Structural Adjustment and the Politics of Reform

Structural Adjustment and the Politics of Reform 145

STRUCTURAL ADJUSTMENT AND THE POLITICS OF REFORM By the early 1980s, governments in many developing countries were recog- nizing the need for reform. The imbalances generated by ISI created pressure for reform, and East Asia’s success provided an attractive alternative model. It took a massive economic crisis, however, for governments to implement reform. We will examine this crisis in detail in Chapter 14; here, we say a few words about it in order to understand how it produced the wave of reform that swept the developing world during the 1980s.

Economic crises struck developing countries during the early 1980s in large part as a consequence of governments’ decision to borrow to finance their budget and current-account deficits. Using foreign loans to finance bud- get and current-account deficits is not an inherently poor choice. But two factors made this decision a particularly bad one for developing countries in the 1970s. First, many of the funds that governments borrowed were used to pay for large infrastructure projects or domestic consumption, neither of which generated the export revenues needed to repay the loans. As a result, the amount that developing countries owed to foreign lenders rose, but the countries’ ability to repay the debt did not.

Second, between 1973 and 1982, developing countries were buffeted by three international shocks: an increase in the price of oil, a reduction in the terms of trade between primary commodities and manufactured goods, and higher interest rates on the foreign debt those countries had accumulated. These shocks increased the amount of foreign debt that developing countries owed to foreign banks, raised the cost of paying that debt, and greatly reduced export earnings. By the early 1980s, a number of developing countries were unable to make the scheduled payments on their foreign debt.

As crisis hit, governments turned to the IMF and the World Bank for financial assistance. The international institutions linked financial assistance to economic reform. The World Bank and the IMF encouraged governments to adopt such reforms under the banner of structural adjustment programs— policy reforms designed to reduce the role of the state and to increase the role of the market in the economy. The specific content of the reforms that the IMF and the World Bank advocated were shaped by their belief that East Asia’s success had resulted from export-oriented and market-based devel- opment strategies (see World Bank 1991, 1993). In the World Bank’s own words, “the approach to development that seems to have worked most reli- ably, and which seems to offer most promise, suggests a reappraisal of the respective roles for the market and the state. Put simply, governments need to do less in those areas where markets work, or can be made to work, rea- sonably well” (1991, 9).

To this end, structural adjustment emphasized changing those aspects of developing economies that were most unlike conditions in Asia. Governments were encouraged to create a stable macroeconomic environment, to liberal- ize trade, and to privatize state-owned enterprises (Williamson 1990, 1994).



146 CHAPTER 7 Trade and Development II: Economic Reform

Macroeconomic stability was to be achieved by transforming government budget deficits into budget surpluses. Governments were encouraged to lib- eralize imports by dismantling import-licensing systems, shifting from quota- based forms of protection to tariffs, simplifying complex tariff structures, and reducing tariffs and opening their economies to imports.

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