` What are 

SAPs?
Overview

Structural adjustment programs (SAPs) are a package of economic and institutional

measure designed to solve macroeconomic problems in developing countries by
reducing government intervention in the economy, correcting the borrowing country’s
deficits and opening the country’s economy to the global market. These programs,
which consist of policies aimed at achieving economic growth, were initially designed
and funded by the World Bank and the International Monetary Fund (IMF), and later,
also adopted by other major international financial institutions (IFIs). Loans are
offered in return for the transformation of economic structures through varying
reforms of deregulation, privatization, slimming down of inefficient public
bureaucracies, reducing subsidies, and encouraging realistic prices to emerge as a
stimulus to greater productivity in order to overcome the problem of increasing
external debt and foster the economic development (Leftwitch, 1996). Since their
inception in the late 1970s, SAPs have become a regular feature of the development
landscape. For example, annual World Bank commitments to structural adjustment
totaled over 20 billion per year in the early 1990s amounting to nearly one-fourth of
the Bank’s annual commitments (Elemendorf, 1993).

Purpose of SAPs

In theory, SAPs are intended to make structural changes which will hopefully provide
long-term solutions to some of the problems facing developing countries by helping
them to acieve economic economic stability and sustained growth. To its proponents,
structural adjustment is a forward-looking, long-term solution to underdevelopment.
SAPs were created in response to the failure of so many “Band-Aid” projects and
programs which only reacted to crises instead of taking a proactive, stance, seeking to
preempt crises before they appear by “addressing the nature of the problem.” (Finch,
1985).

Among the objectives of SAPs are usually cited,

 The reduction or elimination of a balance of payments deficit

 The resumption of higher rates of economic growth;
  The achievement of structural changes that would prevent future payments and
sabilization problems

One of the most important purpose of SAPs is to make the economy less vulnerable to
future shocks. This can be done by increasing flexibility and adaptability (Streeten, 1987).

Some Key Components of SAPs

As earlier defined, structural adjustment programs are sets of policies designed to

reduce and eventually eliminate unsustainable internal and external imbalances in
economies. Structural adjustment policies seek to increase the flexibility of the
economy to respond to changes, promote the efficiency of resource allocation and
utilization, reduce trade deficits, and balance government expenditures and revenues.

The World Bank and the IMF consider structural adjustment to be a logical - and in
many cases inevitable - means to achieve sustained economic growth and address
long-term development needs. SAPs generally include the following elements:

 Reduction of government expenditures and elimination of disequilibria in the

budget deficit;
 Currency devaluation to encourage exports and rectify the balance of trade;
 Removal of restrictions on free currency exchange (convertibility);
 Elimination of subsidies and price controls;
 Privatization of state-owned enterprises and general reduction of government
interference in the national economy (promotion of free market principles);
 Free entry by foreign firms into domestic markets, elimination of import
controls and other trade barriers;
 Slimming down public bureaucracies and general downsizing of government;
 Expansion of tax base and strengthening of tax collection mechanisms;
 Implementation of fee-for-service regimes in education and health care;
 Promotion of free market principles to stimulate efficient allocation of
resources.

Historical Backdrop of SAPs

SAPs evolved as a result of three global crisis, namely; the oil crisis, the debt crisis,
and the international recession from the late 1970s to the early 1980s. Developing
countries faced unprecedented pressure in their external accounts after these
consecutive international economic crisis. In addition, in some areas like sub-Saharan
Africa, rapid population growth, adverse weather conditions such as drought and
mismanagement of economy due to the political instability and corruption became
major contributory factors for economic deterioration (Adepoju, 1993). Exports fell in
both volume and value while imports rose. Consequently, it brought balance-of
payments-problems and foreign exchange constrains. As a direct result of these
events, SAPs were created to deal with the increasing economic instability in
developing nations experiencing economic crisis (Stewart, 1995).

Why Developing Countries Accepted SAPs

Typically, by the time countries seek adjustment loans, they have suffered from high
deficits, rapid inflation, and capital flight. Many countries came to realize that the
problems were fundamental, requiring economic reforms. However, with having
many serious economic problems, many countries could not carry on reforms by
themselves as before at this time because no one was willing to finance them to do
so (Stewart, 1995). To ensure a continued flow of funds, countries already devastated by
debt obligations have very little choice but to adhere to conditions guided by the
World Bank and IMF. Loans under SAPs were virtually the only source of quick-
disbursing foreign exchange available after the economic crisis since the flow of
commercial loans was drastically reduced. The price paid by developing countries to
gain access to foreign exchange in this situation was to agree to significant policy
reform under SAPs (Weaver, 1995). They had to stabilize their economy first as quickly
as possible, so as to attract foreign capital, hoping that structural changes would
overcome short-term imbalances and eventually promote economic growth, especially
sustainable growth.
 Role of Major Agencies
The World Bank havs been the most important agency providing adjustment loans.
However,
the International Monetary Fund (IMF) also moved into structural adjustment
lending with the establishment of the Structural Adjustment Facility in 1986 to
provide additional support for low-income countries. Most bilateral aid agencies like
the United States Agency for International Development also moved significant
proposions pf their portfolios to policy-based assistance.

World Bank
The International Bank for Reconstruction and Development, frequently called the
"World Bank" was established in July 1944 at the United Nations Monetary and
Financial Conference in Bretton Woods, New Hampshire, USA. The World Bank
opened for business on June 25, 1946. The World Bank’s goal is to reduce poverty
and improve living standards by promoting sustainable growth and investments in
people. The Bank provides loans, technical assistance and policy guidance to help its
developing-country members achieve this objective. The World Bank group of
institutions includes:

 The International Bank for Reconstruction and Development (IBRD)

 The International Development Association (IDA)
 The International Finance Corporation (IFC)
 The Multilateral Investment Guarantee Agency (MIGA)
 The International Centre for the Settlement of Investment Disputes (ICSID)

The World Bamk has become the promary financier of development projects in them
Third World. It has also become the Third World's largest creditor. Together the
countries of the Third World owe the World Bank more than US 160 billion.

The World Bank is currently the largest multi-national lending and techinical agency
dealing with Third World development. As the world's lending development agency,
the World bank has a wide-ranging mandate, from consolidating loans for large scale
development projects to providing structural adjustment loans and sectoral adjustment
loans to developing countries experiencing balance of payments problems.

In the 1980s, in the large part owing to the debt crisis, the Bank increasingly served as
a debt-management institution through structural adjustment programs (SCN community
Links).

International Monetary Fund

Established at a conference held in Bretton Woods, New Hampshire, USA, from July
1-22, 1944, the IMF came into official existence on December 27, 1945 when 29
countries signed its Articles of Agreement (its Charter). The IMF commenced
financial operations on March 1, 1947. Currently, there are 181 member countries.

The IMF's main ofjectives are:

 to promote international monetary cooperation;

 to facilitate the expansion and balanced growth of international trade;
 to promote exchange stability;
 to assist in the establishment of a multilateral system of payments;
 to make its general resources temporarily available to its members experiencing
balance of payments difficulties under adequate safeguards;
 to shorten the duration and lessen the degree of disequilibrium in the
international balances of payments of members.

The IMF achieves these objectives by advising member countries on their economic
policies and by providing conditional assistance to member countries experiencing
balance of payment problems.

The IMF played a significant role during the 1980s in "bailing out the commercial
banks." By providing IMF credits to developing countries, essentially to sevrve
commercial debt, the IMF took upon itself the role of "gatekeeper" for creditors,
forcing highly indebted countries to adopt SAPs as a condition not only for receiving
IMF credits, but as the "stamp of approval" debtor countries needed as a condition for
receiving futher grants and aid from all donor sources (SCN Community Links).
 Major Criticism of SAPs
Overview

Short-term Negative Impacts - Who Suffers and Who Gains?

Imposition of Western Expertise

Environmental Impacts

Overview

One of the major criticism on SAPs is that they have actually hurt the poor, deepened
poverty and increased the gap between rich and poor in both local and global terms.
Initially, SAPs were viewed as a temporary measure, to be used for three to five years,
to restore sustainable balance of payment in recipient countries. In the beginning, and
negative effects on poorer people were thought to be “transitional”. However, severe
and painful negative impacts on the poor became apparent in short-term. Some
observers say that SAPs lead to unsustainable resource exploitation and environmental
destruction. SAPs have paid little attention to their environmental impact. SAPs call
for increased to generate foreign exchange to service debt. The acceleration of
resource extraction and commodity production that results as countries increase
exports is not ecologically sustainable. Another criticism of SAPs is that their top-
down styles of development undermine national sovereignty and impose of the
Western Neo-classical model in a context where it may not be applicable. To ensure a
continued flow of funds, countries already devastated by debt obligations have very
little choice but to adhere to the conditions guided by the IMF, the World Bank and
other major donors.

Short-term Negative Impacts - Who Suffers and Who Gains?

In the short run, adjustment involves both winners and losers. The World Bank claims
that it has benefited farmers, processors and manufacturers since currency devaluation
increases the price of imported goods and stimulates exports. However, SAPs’
negative impacts have been more clearly recognized in the process. SAPs were
designed and implemented with little considerations for change in human element in
short-term. The reforms under SAPs were narrowly concentrated on the reform of
macroeconomic structure and tended to neglect socio-economic issues. SAPs failed to
address the needs for poorer people and thus, hurt the poor population. Consumers
(especially the landless and the urban poor) were hit with higher prices of imported
goods (and locally-produced goods by ripple effects) caused by currency devaluation.
Lifting of general subsidies on necessities for living such as electricity, gasoline and
housing affected the poor who depended on them during the removal of
subsidies (Picciotto, 1996).

It is universally accepted that "social" concerns like health and education are greatly
impacted by SAPs. Most often, when governments are told to reduce public
expenditure, the first budget to be cut are those of health, education, and welfare.
Since the wealthy and powerful can afford private medical care or education, they
remain largely unaffected by cuts in budgets while vulnerable sectors including
women, children, the elderly and minorities suffer the most from the short-term
inpacts of SAPs due to sharp cuts in public expenditure.

The reductions in living standards of the poor are likely to be more serious in
countries with low average incomes per capita, partly because incomes are already
low, and even across the board cuts will drive many below the poverty line. Also,
partly because these countries tend to be less flexible and responsive to shocks, they
therefore have to deflate by more for any given correction in the balance of
payments (Streeten, 1987).

Imposition of Western Expertise

Some analysts even believe that structural adjustment programs are a World Bank
policy tool used to subjugate the developing economies and “adjust” them so they
better serve the purposes of the rich industrialized nations. These people are of the
opinion that SAPs are the Western financial system’s attempt to open new markets for
its goods and to create the conditions under which the Third World will continue to
repay its debts to the North’s commercial banks and multilateral lending institutions,
and to provide cheap raw materials for the industrial engines of the First World. The
policies of SAPs focus narrowly on domestic economic adjustment and stabilization
of economy that actually served for the developed countries’ primary self-interest to
sustain development of global economy. In addition, the donor agencies insist in the
argument that democratization in the context of a “free market” economy would
compel government to be more accountable, less corrupt and thus more efficient in
order to promote development since they would be judged on their performance and
thrown out if they did not effectively deliver the needs of the public. Strongly
encouraging democratization to the world, as if it is the only form to foster
development, these agencies actually fail to consider non-democratic government’s
capacity to solve their economic, social and political problems.

Environmental Impacts

The environmental impacts of adjustment processes are mixed. Some of the price
reforms have positive environmental impacts, for example, by intensifying
commercial agricultural production, promoting less-erosive crop mixes, and reducing
subsidies for agricultural inputs. Others have negative outcomes, as exemplified by
widespread extension of substance farming, acceleration of deforestation, and
overtaxing of soil productivity. Downward pressures on living standards and
informalization of the economy have obliged many urban and rural poor to increase
their reliance and pressures on natural resources and environmental services just to
survive(Reed, 1996). The environmental impacts of SAPs differ according to the kind of
economy undergoing reform, that is, whether they are extractive, agricultural,
manufacturing, or information/service economies.

A principle response of extractive economies of SAPs was to expand and intensify

extraction of natural resources to be traded on international markets. This is consistent
with the type of policy changes applied, including removing barriers to capital flows,
encouraging expansion of the export sector, and reducing the state’s regulatory
capacity as regards natural resource management. Under these conditions, the
environmental impacts have been quite damaging.

Subsistence farmers extend production in response to deteriorating economic and

social conditions, leading to major environmental damage. Rural families with little or
no land have no alternative but to intensify pressure on marginally productive
agricultural areas or enter the growing ranks of informal workers in urban centers. The
mutually reinforcing character of deepening poverty and environmental degradation in
broad areas of some countries indicates that environmental problems will worsen in
coming years (Reed, 1996).

Lessons Learned
Much of the blame rests with the economic crisis that preceded SAPs, but clearly the
adjustment policies themselves contributed significantly to the increase of poverty,
and the decline of quality of social sectors such as education, health, welfare and
environment. Many other international development agencies including NGOs and
United Nations institutions have critically reported negative aspects of SAPs. On-
going discussions, evaluations, and criticisms especially focusing on SAPs’ negative
impacts have had strong influence on changes in the approach of the major donor
agencies such as the World Bank and IMF. For example, the World bank emphasizes
that poverty reduction, income distribution, and human/social development have been
adopted into the Bank’s operational policy on SAPs. Now that the importance of
protecting social sectors and living standards is more widely recognized, one might
hope that economic reform will be designed to ease human suffering, not contribute to
it (Adepoju 1993).

Here are some recommendations for the future which have been discussed.

 Structural adjustment programs should recognize the diversity of economic,

social and political structures between countries, and tailor the SAP model to
suit each;
 Social services spending should be maintained, and mechanisms for promoting
equitable distribution should be introduced as a central objective of the
adjustment process;
 The process of goal articulation and program formulation and implementation
should be democratized, in order to ensure local participation and the
maintenance of an open dialogue and close links with local NGOs and CSOs.
 A human dimension is needed, to provide programs to ameliorate the negative
social impacts of structural adjustment.

The World Bank / IMF have stated that in the long run, SAPs will enhance growth,
and provide better access to jobs and social services. Through empowerment and
participation in the decisions that affect their lives, the poor can emerge from
poverty (Picciotto, 1996). If these necessary policy reforms can be successfully
accomplished, structural adjustment reforms will benefit the poor in the long run
through the stabilization and growth of economy (Weaver, 1995).