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Reproduced with permission from
the United Nations Research Institute for Social Development
Structural Adjustment in a Changing World

In a complex world economy, adjustment is inevitable. The normal process of competition is periodically marked by crises which disrupt national economies, create severe balance-of-payments problems and threaten to exclude many people from international markets. Whether these crises stem fundamentally from unwise interference in the market or, on the contrary, from lack of adequate regulation is one of the central debates in economic policy-making.

Although technical expertise (based upon underlying theoretical assumptions) is an important element in designing a response to crises, adjustment is above all a political process. The content of policy reform is shaped by the ability of different groups within adjusting countries to promote and defend their own interests; by the bargaining power of specific deficit countries in the international economic and political arena; and by the internal political agenda of creditor countries during the period when programmes of economic stabilization and assistance are being worked out.

These elements in the political equation of adjustment have changed considerably over the past 50 years; and, in consequence, the content of adjustment programmes has also undergone modification. While stabilization programmes until the 1970s — which restored monetary and fiscal order, and preserved the capacity to import — were not usually followed by attempts to restructure the economy, adjustment in the 1980s and early 1990s was associated with intense pressure to abandon inward-oriented national projects of economic development and to stake the future of people in the developing world on increasingly unprotected participation in the international market.

After briefly reviewing factors which contributed to the rise of the radical free-market form of adjustment, the paper considers some of the lessons which can be learned from experiences with economic reform during the 1980s. The most basic of these is simply that the power to impose solutions, conferred upon creditors through the mechanism of conditionality, can be counter-productive. Reform policies designed in the abstract and applied with little understanding of local realities, often prove unsuited to solving concrete problems in stubbornly idiosyncratic national settings.

The majority of the adjustment experiences now considered relatively "successful" — and they are a small number in relation to the total group of countries engaged in reform programmes — have restored economic order through tempering free-market orthodoxy with regulation of key prices. Defending exchange rates from sharp fluctuations, imposing price controls on a few strategic goods and services, fixing interest rates within certain limits and maintaining wage stability have required a strong state, not a weak one. "Success" has also depended upon obtaining access to large reserves of foreign exchange (whether through state-owned export industries, foreign aid, renewed lines of international credit, or even — in some cases — from the drug trade).

"Successfully" adjusting countries depend for renewed growth on large flows of foreign private investment. Their real accomplishments are therefore threatened by the extraordinary volatility of these capital markets as well as by exposure through indebtedness to the dangers of rising interest rates in the industrialized world. In this sense, it is safe to say that for "successful" adjusters, as for a much larger number of indebted nations which are still mired in deep recession, the debt crisis is far from over.

The social cost of continued recession and restructuring in many Third World countries is high. During the early 1990s, per capita income in most African and Latin American nations was lower than in 1980; and the average income of the poorest strata was much lower. Minimum wages stood at half or less than half their former value. Unemployment in the formal sector was often much higher than at the outset of the debt crisis, although in relatively more successful cases this problem had been resolved in part by generating a great many new jobs which are badly paid and insecure.

During the latter 1980s, governments and international financial institutions began to review the adjustment experience. Under pressure from angry citizens of Third World countries as well as from concerned citizens' groups in the North, economic reform programmes began to take social welfare considerations more explicitly into account. And, in response to obvious problems of reform implementation, attention was increasingly focused on such institutional issues as the need to improve efficiency, transparency and accountability in Third World government; the importance of restructuring and upgrading public bureaucracies; and the urgency of strengthening local level institutions through decentralization and promotion of citizens' organizations.

Nevertheless this incorporation of institutional issues in the adjustment model is still fragmentary and does not systematically explore the links between economic, political and social reform. This situation must be remedied. In fact, it is vitally important to consider how patterns of social change under conditions of continuing economic crisis and restructuring are affecting the capacity of societies to provide a minimal framework of stability and justice, within which people can interact productively.

Local level research suggests that the coping strategies adopted by many different kinds of people, as they confront severe challenges to their livelihood, weaken modern institutions and make good governance more problematic. Diversification of income strategies affects the quality of work and the commitment of employees to the institutions they serve. Growing fragmentation of loyalties weakens unions and other forms of interest association which are in fact essential instruments of dialogue between government and the public. This kind of problem stands behind many of the failed efforts to forge pacts in support of stabilization programmes.

Furthermore the erosion of a structure of modern interest groups in many indebted Third World countries affects the strength of political parties and thus the capacity of political systems to create stable governing coalitions. Violent and unorganized protest is likely to take the place of more formal bargaining procedures in such situations.

Finally, the pronounced widening of income differentials within many countries over the past few decades has played a significant role in weakening broader networks of social interaction and solidarity. There is often a marked cultural dimension to this process of polarization. As they are integrated further into international markets, some people become part of global consumer culture; while others are left to reinforce more traditional ties of identity and support.

Clearly, the particular form of adjustment in vogue for the past 15 years has not created the necessary conditions for most people in indebted Third World countries to have a better future. The paper therefore closes with a plea for wide ranging consideration of new approaches to adjustment and restructuring. Among other things, this debate should take a systemic view of adjustment, assuming that dealing with imbalances in world trade and finance is as much a problem for creditor as for debtor countries. And it should recognize the fact that improving the reform process is as important as improving its policy content. Since there is no single prescription which can be relied upon to solve the complex problems of economic recovery, specific approaches must be worked out through adequate consultation at the national level. In this respect, conditionality should be used with caution: it can pre-empt dialogue and permit imposition of policies which are either technically inadequate, given local conditions, or politically unfeasible, or both.

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