sociology of globalization

In order to receive aid from global economic organiza- tions such as the IMF and the World Bank, receiving nations have had to agree to restructure their economies and societies in line with neoliberal theory. Loans were given, but receiving nations had to agree to various economic reforms (e.g. cutting the size of government and its welfare system, privatization) that facilitated foreign investment and that led to free markets. This came to be known as "structural adjustment," a term first coined by the then World Bank President Robert McNamara in the late 1970s. It, like the closely associ- ated "neoliberalism" (chapter 4 ) , came to be despised by various academic critics as well as by those who lived in less developed nations and who were forced to undergo various structural adjustments in order to receive economic assistance.

Glassman and Carmody look at the economic impact of structural adjustment programs in Latin America in the late twentieth century. They associate struc- tural adjustment with a number of negative economic consequences such as deindustrialization caused, at least in part, by high interest rates. Another negative effect was an increase in economic inequality as the rich grew richer while poverty increased. Control over local economies was increasingly in the hands of large multinational corporations (MNCs) and this served to weaken indigenous enterprise. Turning to Asia in

the 1990s, they find similar negative economic effects such as increased unemployment, declining wages, a weakening of labor unions, and increases in poverty. On the other hand, well-to-do domestic and foreign investors tended to prosper as a result of structural adjustment programs. For these reasons and others, Glassman and Carmody pull no punches in conclud- ing that structural adjustment programs "are clearly wrong for Asia."1

Sarah Babb finds mixed conclusions in the literature on the economic impacts of structural adjustment programs (SAPs), but she focuses her attention on the evidence on, and debates about, the social consequences of structural adjustment for developing countries, espe- cially in Latin America and the Caribbean.

Politically she finds that, when engaged in structural adjustment, states do less of some things (e.g. they are less directly involved in production) but more of other things (e.g. they strengthen private property and they make tax systems more regressive). They also encour- age increased foreign direct investment (FDI) . While these things tend to move those states in the direction of the American model of regulatory capitalism, there are important differences because markets have been transplanted to alien worlds, other societies often over- shoot and go beyond the American model, and there is an erosion of social citizenship in many of these

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societies with a decline in the power of citizens and states vis-a-vis private investors.

A second set of impacts relates to the class structure. While differences between nations are less clear, it is the case that there is an increase in within-nation inequality. Among the causes of this increase in inequality are de-agriculturalization leading to less work for peasants, downsizing and layoffs resulting from the privatiza- tion of state-owned firms, high interest rates used to fight inflation, and an overall strain on labor markets.

Third, there is a rise in transnational networks. Most notable here is the rise of powerful global production networks involving, among others, MNCs. However, transnationalism (see chapter 7) is not restricted to the corporations as migrant workers also develop such networks (and use them, among other ways, to send remittances back home when they find work in other countries). Structural adjustment programs can also play a role in spawning border-spanning resistance movements.

Abouharb and Cingranelli look at the effects of SAPs undertaken by the World Bank between 1981 and 2000. They find that the overall effect of structural adjust- ment agreements (SAAs) "is to worsen government respect for physical integrity rights. Torture, political imprisonment, extra-judicial killing, and disappear- ances were all more likely to occur when a structural adjustment loan had been received and implemented."2

They contrast their more critical orientation to a positive, neoliberal model of the direct effects of SAAs. In that model, rapid economic liberalization is seen as having a positive effect on human rights. They also look at various indirect effects of SAAs including less respect for economic rights, more domestic conflict,

less democracy, and ultimately less respect for physical integrity rights. The authors then review other work on this topic and find that it generally confirms their critical perspective on SAAs.

In their conclusion, Abouharb and Cingranelli make it clear that the World Bank "probably" does not intend the negative outcomes they describe.3 Among other things, the World Bank is publicly committed to good governance and sound human rights practices as ways to promote economic development; it is more likely to give loans to countries with positive records on such matters; and human rights practices improved in various nations in the early years of a loan, probably to impress the Bank.

Lloyd and Weissman found that both IMF and World Bank policies tend to undermine both labor power and the rights of labor. Among other things, these policies lead to a shrinking government labor force, privatization, greater labor flexibility including greater freedom to fire workers, wage reductions, and changes in pension programs that result in the need for people to work longer, to pay more for their pensions, but to get lesser amounts.

While there is much criticism of structural adjust- ment from many directions, Scott argues that at least in the case of Africa, failures there cannot be blamed on the IMF. Rather, he blames Africa's economic problems on its own corrupt leadership. He reviews various IMF programs - devaluation, reductions in government deficits, market prices, and privatization - and finds that in the main they have the potential to be helpful in Africa. Perhaps the most important thing that the IMF could do is to reduce corruption, but the problem of corruption is inadequately treated in IMF programs.

NOTES

1 Jim Glassman and Padraig Carmody, "Structural Adjustment in East and Southeast Asia: Lessons from Latin America." Geoforum 32, 2001:87.

2 M. Rodwan Abouharb and David L. Cingranelli,

"The Human Rights Effects of W o r l d Bank Struc- tural Adjustment, 1981-2000." International Studies Quarterly 50, 2006: 234.

3 Ibid., 256.

S t r u c t u r a l A d j u s t m e n t i n Asia

Structural Adjustment in East and Southeast Asia: Lessons from Latin America Jim Glassman and Padraig Carmody

1 Introduction

The Asian economic crisis, which began in 1997, is a historical watershed. Should the crisis serve to derail the Asian "miracle" economies, it may usher in a new period in the geography of the global economy in which few, if any, developing countries can be optimistic about the prospects for rapid industrial growth - the Asian newly industrializing countries (NICs) having been the primary industrialization success stories in recent decades.

The crisis has also had important impacts on develop- ment theory and practice, for example with divisions emerging between the International Monetary Fund (IMF) and its supporters and the World Bank and various others who have argued that conventional structural adjustment programs (SAPs) are "the wrong medicine for Asia". While not questioning the general thrust of economic liberalization, these critics argue that the "demand reducing" elements of SAPs are designed for countries with large public sectors and substantial public debts such as those in sub-Saharan Africa, Eastern Europe, and Latin America, but that they are inappropriate for the Asian NICs, which for the most part have had relatively small states and debts which are largely held by the private sector.

We concur with the mainstream critics that the IMF's approach is the wrong medicine for Asia. However, this approach has also been inappropriate for countries elsewhere. Rather than the Asian economic crisis being the result of "cronyism" or corruption, which was then punished by international capital markets, we argue that it was the outcome of contradictions inherent in a globalized capitalist economy, and liberalization which exposed Asian countries to these contradictions.

Consequently, further marketization is likely to have systematically negative consequences for the Asian NICs. Seeing what these consequences are likely to be requires an examination of countries which have already implemented SAPs.

Not long ago, it was common to see work on development studies which ruminated on what Latin America could learn from the Asian "tigers". It is now appropriate to shift our geographic perspective and examine what East and Southeast Asia can learn from the experiences of structural adjustment in Latin America during the 1980s and 1990s, if more equitable and sustainable development strategies are to be implemented.

[ . . . ] In Section 2, we briefly describe the context and nature of SAPs. [ . . . ] In Section 5; we revisit the process of structural adjustment in Latin America, highlighting some of its major outcomes and relating these to broader crisis tendencies inherent in capitalist economies. In particular, we suggest that SAPs have inter- locking core-periphery and class dimensions, as well as potential political consequences, which have negative implications for popular classes. In Section 6, we [ . . . ] [show] how the features of SAPs which exacerbated inequality and undermined industrial growth in Latin America are already having similar effects in the Asian NICs, and how these may increase the risks of future crises. We conclude by discussing alternatives to neoliberalism.

2 Global Structural Adjustment

Since the early 1970s the global economy has been in crisis. In the industrial countries this has been manifest

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in deindustrialization and falling real wages for the majority of the workforce. The breakdown of the Bretton Woods system of fixed exchange rates in the 1970s unleashed intense competitive pressures worldwide. Subsequently, the introduction of monetarist economic policies in the core countries in the late 1970s and early 1980s drove global interest rates dramatically higher and triggered a debt crisis in the developing world. Since that time developing countries have been called on to restructure their economies to correct resulting "disequilibrium" under the auspices of the world's two most powerful international financial institutions (IFIs) the World Bank and the IMF.

Structural adjustment is a policy package of "free market" economic reforms sponsored by the IFIs. Initially structural adjustment programs (SAPs) were introduced to offset what were seen as temporary balance of payments problems in developing countries resulting from increased oil prices and interest rates in the late 1970s. However, with the debt crisis, which broke in 1982, structural adjustment programs became more widespread and long-lived than was initially anticipated.

Structural adjustment consists of two distinct ele- ments: macro-economic "stabilization" the purview of the IMF, and "structural adjustment" which entails the restructuring of the economy towards export- orientation under the auspices of the World Bank. Together the combined package is commonly known as "structural adjustment".

The stabilization phase of adjustment focuses on demand restraint policies, usually effected by large reductions in government expenditure via measures such as subsidy removals, public sector employment cuts, and the introduction of user fees (for social services) [...] Structural adjustment involve(s) a realignment of the real exchange rate (through devaluation), privatization, liberalization of interest rates, and tax reform, including reductions in import/export barriers (removal/reduction of tariffs, quotas, and taxes) in order to improve the economy's relative trading position).

In the last 20 years, the vast majority of countries in the developing world have undergone a structural adjustment program. With the onset of the Asian

economic crisis a number of countries there have also adopted them.

4 Embedding Structural Adjustment Programs in Place and Class: Theoretical Issues

The IMF and its structural adjustment policies have been criticized from a variety of perspectives. In particular we want to focus on the implications of SAPs for core/periphery and inter-class relations, as well as suggesting the gendering of some of their outcomes. The net results of structural adjustment are to subordinate peripheral economies to transnational corporations (TNCs), international banks, and core area govern- ments; to generate greater inequality in the distribution of wealth and income between classes; and frequently to place a disproportionate share of the burden of adjust- ment on women. We also argue that in order to gain implementation against popular disapproval, structural adjustment frequendy takes on politically authoritarian characteristics.

The global economic crisis which began in the 1970s has been worked out by the burden of adjustment being passed down from economically stronger areas and social forces to weaker and less politically organized ones. In the first instance, the IMF's insis- tence on currency convertibility and liberalization fosters domination of the periphery from the core by allowing relatively stronger capitals to dominate weaker capitals on an international level. This is largely so because liberalization of capital flows increases the power of international over domestic investors within a national economy. Meanwhile open trade and capital regimes help capital dominate labor by providing tools to resist working class demands for improved wages and social services. Thus SAPs typically allow local elites to pass the costs of adjustment onto the popular classes, because the participation of these elites is necessary in order for the IMF's agenda to be implemented. Within the popular classes, insofar as gender relations are already inegalitarian, women frequently end up taking on a disproportionate share of the burdens of adjustment. These tendencies are illustrated in Latin America.

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5 Economic and Social Restructuring in Latin American NICs under Liberalization: Deindustrialization, Poverty, and Income Inequality

Two of the most pressing needs in developing countries are to reduce the level of unemployment and to diversify economies so that they are better able to withstand external shocks. One of the best ways to meet these needs is through the development of a competitive manufacturing sector that is labor-absorptive. However, structural adjustment causes deindustrialization in a number of ways. High interest rate policies detract from productive investment and negatively affect the balance sheets of companies already in debt. Simultaneously other "demand reducing policies" result in contraction of the domestic market, and trade liberalization may expose domestic producers to competitive displace- ment from overseas.

The experience of Chile is often invoked to justify the policies of the World Bank and the IMF. However, General Pinochet's post-1973 "stabilization" of the economy under IMF guidance resulted in deindus- trialization, an absolute reduction in the number of manufacturing jobs, low investment and the reduction of productive capacity. The situation came to a head in 1981 as it was no longer possible "for firms to continue paying annual average real interest rates of 2 5 - 3 0 % , while during the previous six years ( 1 9 7 5 - 8 1 ) output had grown at an annual rate of only 7%". In some cases financial repayments rose to 5 0 % of the total sales for firms. Consequently in 1982 there were record numbers of plant closures, capital flight and a "desubstitution of imports". From 1967 to 1982, total manufacturing employment fell from 327,013 to 223,138, with some sub-sectors, such as textiles, particularly hard hit.

In Chile, as in East Asia, economic liberalization was associated with the development of a financial "bubble". According to Barros external debt increased significantly after 1974, but much of this was not being used to finance domestic capital formation, but rather increasing amounts of non-traditional imports. This led to an appreciation of the real exchange rate, and a massive increase in the current account deficit. In the Southern Cone of Latin America, the IMF and World Bank have "repeatedly supported combinations of

exchange rate appreciation and capital market liberal- ization which were doomed to fail".

SAPs also tend to be highly regressive in terms of their impact on income distribution. Indeed the motiva- tion of such programs is partly to increase the profit share to "revive" the private sector economy. In response to the crisis which was driven by liberalization, Chile implemented the SAPs during all but one year between 1983 and 1990. Whereas the Asian NICs were noted for their "growth with equity", with often rapidly rising real wages, in Chile from 1981 to 1990 real wages dropped at an annual average of 5%, ending up 10% lower than they had been in 1970. Unemployment averaged 2 0 % during 1 9 7 4 - 8 7 , compared to 6% in the 1960s, and by 1990 the richest 1 0 % of Chileans had increased their share of the national income to 47%. Meanwhile, whereas only 17% of Chilean households lived below the poverty line in 1970, this had increased to 3 8 % in 1986, declin- ing only slightly (to 3 5 % ) by 1990. When the newly elected democratic government took over in 1990, it adopted a significantly less liberal policy regime.

Mexico's experience with SAPs was similar. The previous development strategy was one of import- substitution. However with the advent of the debt crisis, Mexico implemented SAPs in six out of eight years between 1983 and 1990. In contrast to predictions, however, this resulted in a shift not to export-oriented, but to import-oriented industrialization.

From the late 1980s the share of foreign direct to portfolio investment in Mexico declined dramatic- ally. Mexico was able to attract substantial portfolio investment because it had previously met all the IMF conditions, and, as in many of the Asian NICs, the Mexican government pegged the peso to the US dollar. This led to an overvaluation of the exchange rate which hurt Mexico's export competitiveness and encouraged imports. Consequently the trade deficit increased from 0 . 5 1 % o f GDP in 1988 to 6.98% in 1992.

Given the over-valued exchange rate, and the con- sequent cheapness of imports, there were disincentives to invest in productive economic activity. Within the man- ufacturing sector dualism increased, as those subsectors associated with transnational investment or domestic oligopolies experienced rapid growth, whereas many more traditional domestically-oriented industries, such as text- iles experienced a process of deindustrialization. Accord- ing to Dussel Peters the main features of structural change

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in manufacturing in Mexico "are its heterogeneity, concentration and exclusion as well as a significant tendency to lose backward and forward linkages within the domestic economy". This may forebode the future trajectory of much of the manufacturing sector in East and Southeast Asia, as foreign investors have rushed in to buy up highly indebted companies at bargain prices after the devaluation of the region's currencies.

In terms of income distribution in Mexico: after the financial crisis of 1 9 8 2 - 9 1 , the purchasing power of the minimum wages dropped by 6 6 % , in part the effect of repeated currency devaluations. This reduced the purchasing power of the minimum wages to just half of what it was during the years 1 9 3 6 - 8 .

While structural adjustment has been catastrophic for Mexico's popular classes, it has opened up new opportunities in trade and finance for the elite and increased the scale of concentration in the industrial sector. From 1988 to 1994 the number of billionaires in US dollar terms rose from 2 to 24 and by 1994, assets of the richest individual in Mexico exceeded the combined assets of the poorest 17 million. Moreover, the renewed financial crisis of 1994 forced another round of devaluation and pushed workers' wages down further yet. Falling incomes for working class families have forced many young women to find work in the burgeoning maquiladora sector at very low wages and under highly exploitative and patriarchal conditions.

While new inflows of capital to Latin America had, during the early 1990s dulled memories of previous crises, these have once again been rekindled by the financial crises of Mexico and more recently of Brazil, which have illustrated how tenuous are the putative gains from openness to international capital flows. Moreover, on each occasion where crisis has emerged, the core-periphery effects noted earlier by Payer have been prominent. For example, Mexico's bail-out package was accompanied by measures that gave the US Treasury de facto control over the proceeds of the Mexican national oil company, Pemex.

6 The Short-Term Consequences of Structural Adjustment in Asia

In Latin America, SAPs have had the effects described here because they altered neither the structural condi-

tions of dependence nor the class relations which led to or exacerbated the economic crisis - a situation of weak domestic demand (relative to market values produced) and heavy reliance on volatile global finance and increasingly competitive export markets. In fact SAPs exacerbated economic inequality and deepened poverty, thereby further weakening domestic markets. SAPs also increased the susceptibility of local economic processes to control by the most powerful international economic forces, particularly multi-national corpor- ations and global finance, thus undermining much productive indigenous enterprise. In doing so, SAPs simultaneously serve the interests of the global economic core and certain fractions of international and domestic capital within the periphery.

While we recognize the specific differences between various Asian NICs and those of other regions, we do not believe that their successes exempt them from the broader dynamics we have described at work in the rest of the global capitalist economy. Though it is still too early to discern the medium and long-term effects of SAPs in Asia, we can note their results to date.

Along with mandating exchange rate flexibility, Thailand's SAP originally emphasized cuts in central budget expenditures (even though debts were over- whelmingly held by the private sector), with a targeted budget surplus equal to 1% of GDP for 1997/98. Capital inflows were initially to be encouraged through high interest rates and eased restrictions on equity participa- tion in troubled financial institutions. Restructuring of the financial sector included the closure of fifty-eight insolvent finance companies. Wage increases were to be pegged to inflation, whereas in actuality the purchas- ing power of the minimum wage fell. The state also announced its intention to encourage privatization of state enterprises in the energy, transportation, utility and communications sectors.

As the economic situation in Thailand worsened throughout 1998, with GDP declining by more than 8%, some changes were negotiated with the IMF. High interest rates, that encouraged a continuing sense of crisis amongst foreign investors and had crushed many local businesses, were slowly lowered, and the state was allowed to run a budget deficit equivalent to 5% of the GDP during 1998/99. These reflationary measures helped the economy with the GDP growth for 1999 estimated at 3 - 4 % .

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More direct measures ensured that certain "private" interests would be bailed out with public money. The IMF funds were used to pay off the central bank's obligations and to indemnify foreign investors, as well as to restore currency reserves which had been depleted, in part, by efforts to bail out insolvent local finance companies. Overall however, these measures were insufficient to save many domestic capitalists, to the benefit of foreign investors who have been able to buy Thai assets at fire sale prices. Nonetheless, certain well-positioned Thai elites have also been able to take advantage of the opportunities presented by the crisis through activities ranging from arbitrage to new joint ventures with foreign investors.

While some of the edges were taken off Thailand's SAP to facilitate the restructuring of capital, there have been fewer efforts to directly rescue others. As the SAP took hold, unemployment more than doubled - from 1.9% of the workforce in 1997 to 4 . 2 % in 1999. Other estimates place the 1999 rate even higher at 5.1%, while estimating a loss of 1.4 million construction and 140,000 manufacturing jobs between 1997 and 1999. Real wages for manufacturing workers fell from US$ 188/month in 1996 to US$ 133/month in 1999. Consequently the poverty rate is estimated by some to have doubled from around 1 0 - 2 0 % of the population. Unemployment insurance has not yet been developed, and a major program of poverty alleviation was not put in place until 1999. Thus the Thai state has primarily relied on rural society to act as a shock absorber by finding work and residence for those laid off from urban-industrial occupations.

South Korea's SAP had similar oudines to the one implemented in Thailand, in spite of important differences in the industrial and political structures of the two countries. Again, reductions in government spending, increased foreign equity participation in ailing financial institutions, trade liberalization, and privatization measures were emphasized. The first letter of intent to the IMF (3 December, 1997) made restructuring of the financial sector the "centerpiece" of the SAP. Legal changes spurred by the SAP approved of hostile takeovers which will allow foreign investors to purchase up to a third of the shares of Korean companies as well as the establishment of subsidiaries of foreign banks and securities firms. Other changes eliminated the requirement for government approval

of foreign takeovers involving Korean firms with more than 2 million won in assets, except in key industries and defense. As a consequence, Korea's recovery, which has so far been more robust than that of the other two Asian NICs undergoing adjustment, may result in the displacement of a significant number of formerly pro- tected domestic producers by foreign firms through direct investment and imports from overseas. Deindus- trialization would appear to be underway in some branches of manufacturing as textiles, motor vehicles, machinery and equipment, and particularly clothing production have been especially hard hit. Production of "wearing apparel" in South Korea was only 5 4 . 8 % of its 1995 level in 1998.

Particularly important to the SAP was the attack on Korea's powerful labor unions under the guise of improved "labor market flexibility". The strong resistance of Korean labor to such demands was met by bringing it to the table in tri-partite (government, business, labor) bargaining sessions. While this repre- sented a political gain for labor, it was used to impose concessions on it which increased the burden of unemployment, which rose precipitously from 2 . 6 % in 1997 to a high of 8.6% in the February of 1999. Even with significant economic recovery by the end of the year, the number of workers still unemployed was twice what it had been before the crisis. During the crisis women were laid off at a rate seven times that of men, illustrating one of the ways in which class processes connected to restructuring are gendered. Income inequality has also jumped dramatically, with the richest 10% of urban households having incomes 8.5 times higher than the poorest 10%, up from 6.9 times two years previously.

As in Thailand, the economic situation in Korea deteriorated more rapidly than expected in 1998, with a nearly 7% decline in GDP. This forced some changes in the state budget, with the small surplus of 1997 turning into deficits equivalent to 5% of GDP during 1998 and 1999. Much of this deficit was the result of increased spending in support of financial sector restructuring, along with support for small- and medium-sized enterprises and export promotion. But the strength of Korea's labor unions and the need to try to limit their opposition to the SAP also helped produce an increase in spending on unemployment and social safety net programs. At the same time,

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however, spending on education and civil service salaries declined in both the 1998 and 1999 budgets.

In Indonesia the structural adjustment process has been even more difficult, helping to precipitate a continuing political crisis. Structural adjustment in Indonesia also followed an agenda of exchange rate flexibility, state expenditure reductions, financial sector restructuring, wage discipline, and privatization/ liberalization. However, the Suharto regime, in spite of a general commitment to the SAP, vacillated during the key moments where the interests of powerful cronies were at stake, thus earning the distrust of much of the domestic and international investor community, precipitating the regime's violent downfall.

In spite of this political turmoil and the economic free-fall which accompanied it, the Indonesian state did in fact implement a comprehensive package of struc- tural adjustment policies, including eliminating the foreign shareholding limit of 4 9 % for financial firms, approving full foreign ownership of non-banking financial firms, lifting restrictions on foreign owner- ship of companies listed in the Jakarta stock exchange, cutting public spending (particularly on large infra- structure projects), eliminating a number of import monopolies, and cutting tariffs. The severity of the economic crisis, however, has made new opportunities for foreign investors less attractive, with the economy contracting by an estimated 13.7% in 1998.

As broad as the effects of the crisis and the SAP have been, there can be little doubt that workers and the poor have borne the brunt of the difficulties. Estimates of unemployment vary widely, but some place unemploy- ment for 1998 as high as 1 5 - 2 0 % of the workforce in Indonesia. Total reductions in the size of the formal workforce in 1998 have been estimated at over 5 million people, with manufacturing and service sector employ- ment estimated to have contracted by 2 0 % in 1998. Nominal wages were held constant between 1997 and 1998 and the Suharto regime canceled a planned 1 5 % increase in civil service salaries and with dramatic inflation real wages declined between 30 and 5 0 % , reducing them to their late 1980s level.

Poverty estimates in Indonesia are highly problematic, but there is a consensus that the crisis has increased poverty dramatically throughout the country. The International Labor Organization estimates poverty at 4 8 . 3 % , and as elsewhere in Asia, weak or non-

existent social safety net programs have exacerbated this. In spite of the severity of the crisis, it was not until September of 1998, that the Indonesian government announced the possibility of developing a social safety net program, with expenditures on food security, public works, health and education, and promotion of small and medium enterprises - equivalent in total to 6.5% of the federal budget. The development of these programs, however, is difficult in the environ- ment of budgetary frugality which has prevailed under the SAP: even in the context of economic free-fall, the Indonesian state has limited reflationary expenditures and has held the deficit to less than 1% of GDP in 1998 and 1999.

6.1 Lessons a n d future prospects for Asia

Evidence of enhanced opportunities for powerful domestic and foreign investors and worsening short- term economic conditions for much of the population undergoing structural adjustment in Asia is incon- trovertible. While it is not possible to determine pre- cisely how much of this is due to the general crisis and how much is due to the specific measures undertaken as part of structural adjustment, it is clear that SAPs have, by design, pushed down wages and opened new investment opportunities for foreign capital. However, this is not an attempt to derail the Asian NICs general export-led growth drive (contrary to assertions by Malaysia's Prime Minister Mahathir), but to restructure it by enhancing the participation of foreign capital, and to open up the region to Western, particularly US exports. One US trade negotiator noted that the US had achieved more by way of opening the South Korean market for car parts in six months of bail- out talks than during ten years of bilateral trade negotiations.

In this context, what is important to the analysis of SAPs and their possible longer-term consequences is not merely the empirical evidence, but the explan- ation of the power relations that push in the direction of worsening income distribution and increased dependence. Some of the same kinds of general forces and outcomes which played out in Latin America under structural adjustment in the 1980s and 1990s are beginning to show in Asian countries undergoing SAPs. These forces, while instantiated in specific ways

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in different contexts, are likely to weaken the position of the popular classes while making the economies as a whole more dependent on Western capital flows.

Problems of dependency are likely to be the greatest in Thailand and Indonesia, which have relatively rudimentary levels of technology development and will be increasingly dominated by the decisions of TNCs, but even in South Korea this is an important issue. While the chaebol are far more technologically advanced and sophisticated than their counterparts in Southeast Asia, they retain a strong dependence on technology imports from Japan.

While the necessity is for further economic diversifica- tion and up-grading in Asia, SAPs will also reinforce an emphasis on competition through low-labor costs. In the short-term this will exacerbate underconsumptionist tendencies in the global economy and over-reliance on volatile export markets. In a global market, sustained competitive advantage is dependent on the introduction of new skills and technologies to raise productivity. Even if SAPs in Asia restore growth, and growth succeeds once again in raising wages, in a liberal environment, capital may respond by moving off-shore.

All of this points more generally to the dangers of a development strategy based on foreign capital inflows. Apart from its greater spatial mobility and the depend- ence this creates on decisions taken outside the national economy, foreign capital has other disadvantages. Many commentators now emphasize the importance of foreign direct over portfolio investment. Due to greater sunk costs, FDI has a longer-term commitment to an economy. It may also bring new skills and technology, but FDI is highly import-intensive and consequently current account deficits often tend to rise more than FDI inflows.

FDI is also meant to be a cheap form of finance, how- ever the rate of profit remittances from FDI can also easily exceed international interest rates, implying a net loss for the national economy when comparing foreign debt to FDI as a source of capital for industrialization, at least on this score. Whereas South Korea made sub- stantial use of foreign debt to finance its industrialization, it was channeled through the state and tied to per- formance standards on the part of firms. Once there was substantial capital account liberalization domestic firms in Korea accrued heavy foreign debts, making them vulnerable to devaluation in the context of a

floating exchange rate regime. Structural adjustment will further reinforce this risk.

Foreign portfolio investment is particularly danger- ous, because it flows mostly into stock markets and results in their appreciation in value, increases domestic stockholders' wealth. In the context of an open trade regime, this contributes to increased demand for imports, thereby worsening any trade deficit. Furthermore, inflows of foreign capital may contribute to an appreciation of the real exchange rate, thereby undermining export growth and making imports cheaper. Yawning current account deficits served as triggers for both the financial crises in Mexico in 1994 and Thailand in 1997 as inter- national investors feared currency devaluations which would reduce the hard currency value of their invest- ments. If Korean and other local firms are displaced by imports, as a result of trade liberalization, this may make the region's financial markets more fragile, while simultaneously increasing dependence on speculative and volatile portfolio capital as a source of growth. Mexico's previous experience is particularly instructive in this regard.

Structural adjustment also has wider political implica- tions. The conventional wisdom has it that there is a mutually reinforcing relationship between "free markets" and electoral democracy. Thus, it could be argued that moves towards both political and economic liberalization took place concurrently in East Asia and Latin America in the 1980s and early 1990s. However, the timing of the relationship is important. In Latin America it was disillusionment with the structural adjustment policies of authoritarian governments which was partly responsible for the shift towards electoral democracy. In South Korea it was a militant workers' movement which pressed for political democratization.

In East and Southeast Asia the strictures on struc- tural adjustment may lead to democratic reversals, rather than democratization, if the state responds to struggles against SAPs with repressive force, some- thing which has already occurred to some extent in South Korea and Indonesia. Beyond this, there is a clear move in Asia to "insulate" economic policy-making from "political interference", with authoritarian macro- economic governance by internationalist, neoliberal elites under an umbrella of formal political democracy. The hegemony of the neoliberal policies deployed by these internationalist state managers, along with the

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crucial practical support they garner from an unaccount- able international investment community and the IMF, contradict the notion that liberalization is necessarily a move in the direction of democratization more broadly conceived. Rather, the rise of neoliberal hegemony, while helping to disable some of the more egregious military dictatorships (as in Indonesia) is supplanting this form of domination with more deeply entrenched practices of non-military domination; forcing unpopu- lar policies on populations in the name of economic necessity and "competitiveness". SAPs are an integral component of this anti-democratic, neoliberal moment and have justifiably been a target of popular discontent. It is thus amongst anti-SAP coalitions that the struggle for genuine economic accountability and democratiza- tion is to be found.

7 Conclusion

In our view, SAPs are clearly wrong for Asia, not only because of their demand restraint elements, but also because of their more general emphasis on unrestricted trade liberalization and openness to international capital which have resulted in the "globalization of poverty". SAPs have well-documented and quite con- sistent outcomes across different countries, and this consistency reflects the relatively stable core-periphery and class characteristics of the structural adjustment process.

Specific SAPs do turn out somewhat differently, depending on the context. For example, in the Asian NICs undergoing adjustment, there have been sub- stantial differences in social safety nets and other co-optive measures implemented by the state, and with their more highly developed technological capabilities, Korean firms are better placed to compete in the global market than their Thai or Indonesian counterparts. However all SAPs issue forth from the same kind of transnational class coalitions and have the same general purposes. They largely originate within the core and reflect the relative power of core and peripheral capitals. Given this, the fact that SAPs seem to consist- ently worsen income distribution, pose new burdens for working class women, and strengthen the position of core area investors is not surprising. To neglect these continuities would be, in our view, to undermine the

political project of opposition to SAPs and the promo- tion of alternatives.

These alternatives are many. They range from nation- alist initiatives such as those undertaken by the Malaysian state, which reintroduced capital controls to enable reflation of the economy, to more popularly based initiatives seeking a transformation in the structures of power, such as the activities of Thailand's Assembly of the Poor. In Asia, some scholars have called for policies and practices which reorient the region's economies towards the satisfaction of basic needs, empowerment and environmental sustainability by reducing the scale at which economic activity takes place. We do not know which combination of alternatives is likely to take root, but social forces committed to a more egalitarian and self-directed future will certainly resist the major features of the SAPs.

To be sure, the global prospects for the implementa- tion of alternative approaches appear to be bleak. In terms of its core-periphery dimensions, the success of global structural adjustment in reasserting US economic dominance is evidenced by the economy growing rapidly at over 4% for 1999, with real wages rising for the first time in decades in the late-1990s. This gives great weight to the US governments' bullish adherence to the "Washington consensus" favoring global neoliberalism.

In order for local struggle to be effective it seems likely that there would need to be new international institutions which reduce the global power of finance capital. However, the US in particular has blocked recent attempts to reform the international economic system. This may change in the future as the US economy cur- rently suffers from some of the same risks that brought about the crisis in East Asia. As portfolio investment has flowed in from overseas to the "safe haven" of the US stock market its value has risen. While the "new economy" in the US was partly built on the basis of a cheap dollar to revive exports in the late 1980s and early 1990s, the US is now dependent on a strong dollar to keep the confidence of international investors. The former Chairman of the Federal Reserve in the US, Paul Volker, argued recently that "the world economy was currently dependent on the US consumer, who was dependent on the stock market, which was dependent on about fifty stocks, half of which had not shown a profit". Much of the US consumer demand is being met

S o c i a l C o n s e q u e n c e s o f S t r u c t u r a l A d j u s t m e n t

by imports, with the US trade deficit at record levels. If domestic US producers are displaced by imports, and the connection between productive and financial returns "grounds" in the minds of investors, the US stock market may fall drastically in value, creating a

global depression. Should that happen the US govern- ment may be forced to reconsider global neoliberalism. If and when it does, we are sure there will be no short- age of ideas for alternatives coming from the people and countries which have had to endure SAPs.

The Social Consequences of Structural Adjustment: Recent Evidence and Current Debates Sarah Babb

Introduction

Once upon a time, intellectual debates around the rela- tionship between wealthy and poor nations could be summed up under the rubric of modernization versus dependency. For modernization theorists, all good things went together: capitalist development, democratization, industrialization, urbanization, rational-legal admin- istration, and increased well-being were assumed to be part of a single process that occurred in roughly the same way in all national contexts. In contrast, depend- ency theorists argued that the domination of rich over poor countries meant that modernization looked quite different at the periphery. Because of such rela- tions of domination, foreign investment and national industrialization did not propel developing countries along the same trajectory as the wealthy democracies, but rather was compatible with manifold economic, political, and social distortions.

Beginning in the 1980s, however, this debate was rendered obsolete by a very different hegemonic order. Whereas modernization and dependency theorists alike had advocated for strong government involvement in promoting economic development, the new conven- tional wisdom demanded a dramatic downsizing of many government interventions. Associated with the structural adjustment lending programs of the World Bank and International Monetary Fund ( I M F ) , and

neoliberal ideology, the new policy discourse sug- gested that it was only through thus liberating market forces that poor countries could grow and catch up to the developed world. Whereas modernization and dependency theorists were drawn from a range of social science disciplines, both the new model and its most prominent critics tend to be economists. Much of the recent work on the consequences of structural adjustment, therefore, has focused on its economic consequences. This essay, in contrast, seeks to revisit some of the older themes of modernization and depend- ency through looking at recent literature addressing the social dimensions of recent trends.

Structural Adjustment in Historical Perspective

Structural adjustment is a relatively recent phenomenon. In the decades following World War II, economic policy in the industrialized core reflected Keynesian economic ideas that prescribed the taming of markets through macroeconomic interventions. In poorer countries, much more direct state interventions in the economy were tolerated or even encouraged by the core. Even in nominally capitalist developing countries, state-owned enterprises played a significant role in national output during this period; indeed, they were actually encouraged

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For former Bank chief economist Joseph Stiglitz, as well as unions and workers' advocates, the IMF/Bank record makes it imperative that basic workers' rights be protected. If there are to be diminished legal protec- tions and guarantees for workers, and if IMF/Bank- pushed policies are going to run contrary to workers' interests, they say, then workers must at the very least be guaranteed the right to organize and defend their collective interests through unions, collective bargain- ing, and concerted activity.

But the Bank has stated that it cannot support workers' freedom of association and right to collective bargaining. Robert Holzmann, director of social programs at the World Bank, told a seminar in 1999 that the Bank could not support workers' right to freedom of association because of the "political dimension" and the Bank's policy of non-interference with national politics. Holzmann also raised a second

W h o Has Failed Africa?: IMF Measures or the African Leadership? Gerald Scott

"problem" with freedom of association. "While there are studies out - and we agree with them that trade union movements may have a strong and good role in economic development - there are studies out that also show that this depends. So the freedom by itself does not guarantee that the positive economic effects are achieved."

Shortly after the 1999 seminar, labor organizations met with the World Bank and IMF. According to a report from the ICFTU, World Bank President James Wolfensohn reiterated Holzmann's point, saying that while the Bank does respect three out of the five core labor rights (anti-slavery, anti-child labor, and anti- discrimination, it cannot respect the other two (freedom of association and collective bargaining) because it does "not get involved in national politics." The ICFTU reports that "this statement was greeted with stunned disbelief by many present."

Introduction

Many writers have suggested that International Monetary Fund (IMF) Structural Adjustment Programs in Africa have not only damaged growth prospects for many countries, but have further worsened an already badly skewed income distribution. Some of these writers have claimed that IMF programs have ignored the domestic social and political objectives, economic priorities, and circumstances of members, in spite of commitments to do so. In a recent article, an African critic submitted that IMF measures have failed Africa. He claimed that "after adopting various structural adjustment programs, many [African] countries are actually worse off." Not unlike many, he seems to be suggesting that IMF pro- grams have been somewhat responsible for the severe decline in economic conditions. Some critics of IMF programs have pointed out that the fact that economic

conditions have deteriorated is not conclusive proof that conditions would be better without IMF programs. They do however stress that the developments associated with IMF programs have been extremely unsatisfactory. At the same time, this association does not necessarily imply that IMF programs cause economic decline in the region.

The main purpose of this paper is to argue that of all the feasible alternatives for solving Africa's current economic problems, IMF programs are the most promising. The paper will not contend that the panacea for the seemingly unsurmountable problems rest with the IMF. However, it will argue that IMF programs are better poised to help Africa reach its economic goals, or improve economic performance.

First, we will examine the main reasons for the region's dismal economic performance over several decades. Secondly, we will evaluate the evidence that has been

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used to reach the conclusion that IMF programs have had a deleterious effect on Africa's economic performance. Thirdly, we will present a case for the attractiveness of IMF programs, and a discussion of some specific pre- scriptions in IMF programs.

Why Has Sub-Saharan Africa (SSA) Performed So Poorly?

The problems of slow growth, high inflation, and chronic balance of payments problems continue to plague SSA well into the 1990s. In general these problems can be traced to international or domestic factors. During the last two decades a number of adverse events in the international economy have contributed to the economic decline in the region. These include oil crises, global recessions, deteriorating terms of trade, protectionism in the developed countries' markets, rising real interest rates, and the lack of symmetry in adjustment to payments problems. In addition a number of adverse developments in the domestic economy have inhibited productive capacity and thwarted the attempts to initiate and sustain economic growth.

No doubt, many countries lack appreciable amounts of essential resources and adequate infrastructure for sustained growth. It is also true that growth and develop- ment in many nations have been set back by droughts, civil wars, and political disturbances. It may even be true that colonial economic structures still account for many inflexibilities that inhibit economic growth. However, many countries could significantly improve economic performance and reduce poverty significantly if they managed their economies more efficiently, controlled population growth, and abandoned those policies that are so obviously anti-developmental.

The major setback has been gross mismanagement, which has largely resulted from corruption, rather than from incompetence and absence of skilled admin- istrators. In many nations, national resources for investment, growth, and welfare have been consistently diverted into private hands and used largely for con- spicuous consumption. Poor public sector management has resulted in large government budget deficits, which contribute to inflation, which in turn encourage undesirable import growth and serious balance of payments deficits. Quite simply African leaders, admin-

istrators, businesses, and political insiders have been engaged in corruption on a massive scale. The result has been almost complete destruction of the economic potential in many nations.

For the purpose of solving Africa's serious eco- nomic problems, there is need for the political will to attack the fundamental causes. If the present dis- quieting trends are not urgently tackled with the appropriate policies, then an even more somber future looms on the horizon for many Africans. Any pack- age of measures should include policies designed to revitalize, expand, and transform the productive sectors into viable and self sustaining entities. In the absence of corruption public resources can be allocated effi- ciently to facilitate growth in the productive sectors. The microeconomic efficiency that results from efficient resource allocation, coupled with appropriate macro- economic stabilization policies, would greatly enhance the prospects for economic growth and prosperity.

Assessing IMF Programs

Studies aimed at evaluating IMF programs in Africa conclude that the results are mixed, ranging from disappointing to marginally good. Inasmuch as it is difficult to assess the overall effect of IMF programs some studies have shown that they have been some- what successful in terms of a number of key economic indicators. One main reason for the contention that IMF programs have been harmful is that many countries with programs have performed as badly as those with- out IMF programs. One must be cautious in examining the performance of key economic indicators following IMF programs because of the dynamics of the setting in which they are implemented. But let us suppose for the sake of argument that IMF programs actually result in deteriorating economic conditions immediately following the program. For example, suppose economic growth declines as a result of the program. Even though economic growth is perhaps the most important objec- tive of national development policy, it is still reasonable to consider a program successful if it laid down the basis for future realization of economic growth, within some reasonable time period. In other words if it established the economic structure that promotes and facilitates long term growth, then it can still be

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regarded as successful. In addition it is possible that even though conditions did not improve, the program may have prevented economic conditions from deteri- orating even more. It is not possible to subject IMF programs to controlled experiments. However, it seems more reasonable to argue that without IMF programs, in many countries, conditions would have been much worse, than one would argue that IMF programs cause conditions to worsen.

It has somewhat been fashionable, especially amongst those with very limited knowledge of the various economic rationales behind IMF recommendations, to reject those recommendations without presenting a feasible alternative. Many object to the IMF and some regard it not only as a representation of western economic interest, but as too uncompromising and arrogant in its relationship with nations in crisis. The indications are that IMF is usually anxious to intervene even before conditions deteriorate into a crisis. But like any prudent banker it has to be concerned about repayment prospect, which is essential for its very own survival and continuous provision of its service to other deserving members.

Why IMF Programs May Be the Answer for Africa

IMF programs in the 1990s should have a major attrac- tion for Africans genuinely concerned with the welfare of the people for a number of reasons. First, the pro- grams are no doubt based on sound theory, always a useful guideline for policy-formulation.

The peculiar social, political, and economic circum- stances of African nations and the inability or refusal of the IMF to take them into account in the design and implementing of programs have been cited as reasons why IMF programs have "failed" in Africa, or are doomed to fail. On the contrary, these particular African circumstances are in fact another good reason why IMF programs may be the right answer to the problem. Because of the nature of African economic circumstances, particularly problems in economic administration, the conspicuous absence of commitment on the part of politicians and administrators to the development and welfare of the nations, the absence of institutional capacity, and the weak civic consciousness, the best policy

is to embrace IMF programs. IMF programs encourage the dismantling of controls and simplification of the bureaucratic process; emphasize the strengthening of institutional capacity; require public accountability and responsibility; emphasize efficiency and economic discipline; encourage private sector participation in the economy; foster coordination in economic decisions and promote macroeconomic stability; and emphasize measures designed to expand aggregate supply.

The optimal policy intervention for dealing with an inefficiency or distortion is to seek the source of the problem. IMF programs are attractive because they are designed to attack the problems at their source. In African nations there are many problems that are outside the control of the officials and administrators. However corruption is not one such problem and it need not be so pervasive and economically destructive. Although it is very important not to under-emphasize the importance of many other problems of development, corruption is an obstacle that can largely be controlled, if the top leadership is committed to that objective. It is not the same problem as say drought or poor resource endowment, or an absence of a skilled workforce, that is largely outside the control of officials.

One major attraction of IMF programs is that they tend to remove all opportunities for corruption, i.e., they seek the source of the problem. For example, the suggestion that controls should be dismantled is in recognition that the reliance on physical controls for resource allocation is inferior to the market mechan- ism, especially in the absence of an efficient adminis- trative machinery for the effective administration of controls. But perhaps the more relevant point is that a proliferation of controls usually lays the foundation for corruption, which has continued to destroy economic life in the region.

In reality it is not the IMF who has failed Africa, but the African leadership. The politicians and public sector officials have conspired with private businessmen and firms to adopt and implement policies that benefit themselves at the expense of national development and welfare. The inability or unwillingness of Africans to demand more accountability and responsibility from both politicians and public servants ensures that violations of the public trust are not treated as illegal, immoral, unethical or non-nationalistic actions. If the IMF has failed Africa, it has done so by failing to

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vigorously condemn or expose corruption or even assign it the prominent place it deserves in the design of programs.

Many who oppose IMF programs have argued that they impose severe economic harm on the deprived peoples of Africa. Who are these deprived peoples and what is the evidence? The majority of them are rural inhabitants who have virtually been untouched by modernity. They are largely farmers, have limited participation in the modern economy, consume limited manufactured goods, and have very limited access to basic social services provided by governments. In the urban areas there are Africans of diverse economic circumstances ranging from those in abject poverty and squalor, to those of enormous wealth. The urban population is usually more politically powerful and its views have been the barometer used to measure or assess the political climate. On balance IMF programs will tend to harm the urban poor given the structure of their consumption basket and their production pattern. On the other hand the rural population could benefit immensely from IMF programs for similar reasons, and the efficiency gain to the nation would more than compensate for the loss experienced by the urban population. No convincing evidence has been advanced to support the claim of impoverishment of the majority of rural African peoples.

Even though the urban poor could face the most severe hardship as a result of IMF programs such adverse consequences could be mitigated even within the con- text of those same programs that supposedly impose such hardships. There is some empirical evidence that IMF reforms will improve the distribution of income and help the poor. There is also evidence that appro- priate exchange rates and price incentives improve economic performance, and that private enterprises perform better than state enterprises.

What Africans need is a set of institutions that would enable them to effectively demand the very modest conditions the people deserve and subject all officials to full responsibility and accountability. Given the levels of ignorance, ethnic loyalties, poverty, disillusion- ment and despair, absence of strong nationalistic and patriotic attitudes, I shudder to imagine the difficulties associated with establishing such institutions. Not- withstanding, the task is possible if the leadership is committed to doing so. Based on the current structure

of African institutions, and the record of policy makers, IMF programs are more likely to be effective than other possible alternatives.

Let us examine some of the recommendations and issues in IMF programs and discuss their effects on national welfare.

Devaluation

A devaluation increases the prices of traded (relative to nontraded) goods and will induce changes in pro- duction and consumption. First, as imports become more expensive less will be demanded, thereby curbing excessive import demand which is a major source of balance of payments deficits. At the same time produc- tion of import substitutes will be encouraged. Secondly, exports will become expensive so that less will be con- sumed locally and more will be produced. Exports will also be cheaper in foreign countries, so that more will be demanded. Foreign firms that split production into several stages will find the country attractive for their investments, and tourism will also receive a boost. The devaluation will therefore stimulate the export and import substitution sectors. The political concern usually is that the urban consumers whose purchasing power has already been eroded by inflation partly from excessive government spending, will have to pay more for basic manufactured goods, the bulk of which are imported. Not surprisingly, there is usually an anti- devaluation sentiment in the main urban areas. It is very important to emphasize that the devaluation by itself will not correct the problem of macroeconomic instability. It must be accompanied by sound fiscal management that complements rather than counteracts the effects of the devaluation. For example, if the govern- ment continues to maintain significant fiscal deficits after devaluation, then the devaluation would soon be reversed as the exchange rate becomes overvalued again. An overvalued exchange rate is subversive to long-term growth and balance of payments adjustment.

The African rural population consumes imported manufactured goods only in limited amounts, but could potentially benefit from devaluation because it will increase the price of agricultural exports. A program that prescribes a devaluation so that exchange rates are competitive, should ensure that the producers of exports are not unreasonably exploited by middlemen

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(including government) to the extent that they have no incentive to expand production.

A legitimate concern is that devaluation will raise the price of essential inputs and stifle the supply response as the cost of production rises. In the first place, as long as cost of production lags behind prices, producers will find it profitable to expand production. In any case the appropriate supply response could be encour- aged by an appropriate production subsidy. This of course involves an additional strain on the budget, and the IMF insists on fiscal restraint as we will see shortly. Fiscal reform involves maximizing tax revenue and ensuring that it is used to maximize macroeconomic performance. This means that those who have been avoiding their tax burden, especially the self employed, must be made to meet their tax obligations, and that frivolous and wasteful expenditures must be avoided.

G o v e r n m e n t budge t deficit

When IMF programs recommend reductions in gov- ernment expenditures, the concern is not only with the adverse effects of budget deficits on inflation and the balance of payments, but also with bogus budgetary appropriations that benefit private individuals and deprive the nation of developmental resources. As a result of the pervasiveness of corruption, many govern- ments typically appropriate funds for the salaries of nonexistent civil servants or for goods and services that are not received. Similarly it is common for governments not only to pay highly inflated prices for goods and services, some of which are totally inessential, but also for governments to receive far less than market value for goods bought by some individuals or firms. IMF prescriptions on the budget can be viewed as perhaps a subtle way of telling African leaders that from their past record they cannot be trusted to appropriate the nation's resources in the national interest. This appears paternalistic, but should be acceptable to all concerned with the welfare of the mass of African peoples.

Government budget deficits as a percentage of GDP increased sharply after independence in many countries, as the states intervened ostensibly to correct the perceived flaws of a market economy. The evidence indicates that throughout the region the states have failed to perform the role of a prudent entrepreneur,

and government investments have resulted largely in considerable inefficiency. Public enterprises have been inefficiently operated, as they have largely been used as a way of providing patronage to political insiders.

Government budget deficits financed largely through money creation, have contributed to serious inflation and balance of payments problem. These deficits have not been consistent with other macroeconomic objec- tives of the government. The control of the deficit usually requires reducing expenditure, including the elimination of subsidies to consumption, and increas- ing taxes. In many African nations it is common for the government to subsidize the consumption of essential food items, gasoline, electricity, public transportation etc. The major beneficiaries are the urban population and mostly political insiders who for example obtain goods at subsidized prices and resell at black market rates. The typical rural inhabitant, because of the struc- ture of the consumption basket does not benefit much from government subsidies.

M a r k e t prices

IMF programs attempt to promote a strong link between work effort and reward. This involves appro- priate prices of goods and services, and factors of production. Prices not only provide information to producers but serve as an incentive that facilitates efficient resource allocation. The major problem in African countries has been inadequate production. Production has been constrained by a large number of factors including inappropriate prices. In many African countries the tax system has turned the terms of trade against agriculture and has resulted in very slow or negative growth rates in this sector. Overvalued exchange rates are an implicit tax on exporters since exporters receive the official rate.

The imposition of market prices for agricultural commodities typically results in higher food prices. Rural farmers benefit as producers, but as consumers they lose. However as long as they can respond suffici- ently as producers, their gains will be more than enough to compensate for their losses and the nation as a whole will benefit. The challenge of reforming prices is to ensure adequate production response, which may require other complementary policies.

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The continuous proliferation of price controls will only continue to stifle production, worsen shortages, and reduce incentive for investment.

Privatization

African governments have argued that they have an obligation to provide goods and services usually pro- vided by private enterprises in developed countries, because too often the market fails to do so. Thus they are compelled to invest in capital formation that will increase output, improve efficiency in resource allocation, and make the distribution of income more equitable. Those are desirable objectives and any government that achieves them deserves widespread commendation. Unfortunately the record of the public enterprises which are usually set up to pursue these objectives has been very disappointing. These public enterprises have been very inefficiently administered, and have been widely used by politicians as opportunities for patronage to their supporters.

In recommending privatization of certain public enter- prises, IMF programs attempt to deal with two problems. The first is micro inefficiency in the productive sector, and the second is government budget deficits that result partly from the need to subsidize inefficiently run enterprises. Private enterprises that continuously make losses go out of business, but government enterprises with similar balance sheets receive political relief. By turning over certain enterprises to private institutions, the pressure on the budget eases, and there is a greater chance of increasing efficiency in production.

C o r r u p t i o n a n d rent-seeking

The issue of corruption is inadequately treated in IMF programs even though it is perhaps the most important cause of economic decline or stagnation. This issue has been left to the African peoples to deal with. Unfortu- nately they seem to lack the capacity to do so effectively. International institutions should adopt a more aggressive role in the process of eliminating corruption, rather than the somewhat lukewarm support for the estab- lishment of democratic institutions.

In African nations in which corruption is acceptable and institutions are structured such that they can easily

be transformed into breeding grounds for corruption and rent seeking it is not surprising that corruption is so extensive.

The IMF way of dealing with corruption and rent- seeking is to destroy all opportunities for those activities. If all economic agents realize that prosperity can only be achieved through hard work, innovation or other legitimate means, then most people will become hard working, innovative or pursue other legitimate activities. But as long as public officials or businessmen can con- spicuously display their enormous wealth that cannot be attributed to their innovation, business acumen, hard work, inheritance, winning a lottery, etc., without any fear of been asked by the appropriate authorities to account for their wealth, inefficiencies and corrup- tion will continue to flourish. The average African must first realize that the luxury automobiles or the villas arrogantly displayed by a public servant, may be connected with his or her poverty and deplorable living conditions. Then the African must insist on full accountability of all public servants. Possessing a sense of nationalism that is much stronger than ethnic loy- alties, in addition to strong leaders who are obsessed with the welfare of the people instead of an obsession with status, power, and wealth, will contribute immensely toward the elimination of corruption in the region.

There can be no doubt that if corruption is eliminated, or even controlled, a sizeable proportion of Africa's problems will disappear and the continent can then fully focus on utilizing its scarce resources for maximiz- ing production and consumption.

Conclusion

African economic problems over the last two decades, can be traced mainly to a host of international and domestic factors. Many of the international factors and some of the domestic factors such as lack of suit- able resource endowment, are outside the control of the governments and administrators. However, a significant part of the problems can be traced to corruption and other forms of inefficiencies. Instead of blaming the IMF for the dismal performance in Africa, we should focus on the African leaderships and their policies. The level of their commitment and

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the policies they have adopted and implemented increasingly seem to confirm only their deplorable lack of compassion for fellow Africans and a callous detachment from the people's welfare. The status quo must change to prevent further erosion of the economic base on the continent.

The best foreign assistance is one that has a lasting effect; it is one that would empower Africans to fully participate in the growth process, and provide them with the irrevocable ability to effectively demand the modest living conditions that they have been unjustly deprived of by their leaders for so long.