Azmat, Fara; Samaratunge, Ramanie --- "Poverty and deficits linger. Developing countries" [2007] MonashBusRw 38; (2007) 3(3) Monash Business Review 18

Poverty and deficits linger
Developing countries

Fara Azmat, Ramanie Samaratunge

Structural adjustment programs (SAPs) are conditional policy changes implemented by the World Bank and the International Monetary Fund in developing countries to reduce a country’s fiscal imbalances. They reduce the role of government and focus on macroeconomic reforms such as promoting free trade and deregulating financial, legal and regulatory frameworks.

The policies of SAPs typically constitute a phase of ‘stabilisation’. These policies can include a 0–1 per cent budget deficit, control of inflation, a new competitive exchange rate through devaluation and equilibrated balance of payment and a phase of ‘structural change’ that includes liberalisation of trade and capital flows, privatisation of public industrial and service enterprises and financial and administrative reforms to introduce market forces in the public sector. Although SAPs have successfully opened many economies by eliminating excessive and inefficient state control, they have mostly failed to control fiscal deficits and, more importantly, to alleviate poverty. Launched in 1997 with the consent of the World Bank, the Structural Adjustment Program Review Initiative Network (SAPRIN) investigated the impact of SAPs in eight countries: Bangladesh, Ghana, Uganda, El Salvador, Mali, Zimbabwe, Ecuador and Hungary. It found that structural adjustment measures have significantly increased poverty, inequality and social exclusion. Meanwhile, a study of Sub-Saharan Africa (SSA) found that even after three decades of SAPs, ‘sustainable economic and market viability is yet to be restored in any single country’.

So what went wrong?

Good governance

The most common elements of good governance include political accountability, a sound judicial system, accountability and transparency and, most importantly, incorporation of market principles in the operation of public organisations. Good governance needs a high level of cooperation and collaboration between sectors to ensure synergetic relationships and lower governance transaction costs.

A World Bank-commissioned study from 2003 identified a set of governance indicators covering almost 200 countries for the period 1996–2002. It focuses on six dimensions: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption. These indicators are closely interlinked and it is reported that adherence to any of the six indicators causes a two-and-a-half-fold increase in per capita income, a four-fold decrease in infant mortality and a 15–25 per cent increase in literacy. The establishment of good governance – critical for the successful outcomes of the reforms – therefore remains as a great challenge for both International Financial Agencies (IFAs) and third world countries.

Conditionality and policy ownership

Aid conditionality has been used by the financial agencies as a popular instrument to promote policy reforms in third world countries. However, so far this conditionality has not delivered the desired rates of compliance among the loan recipient countries. Despite the expansion of its use since the 1980s, conditionality is being questioned as ineffective, intrusive and corrosive. The problem with it lies in the actual ownership of the program. Put simply, country ownership of programs is essential as this not only generates a firm commitment from the national government, but it also increases the probability that programs will succeed and that money and resources provided will be used properly.

Stakeholder involvement

Agreements on implementation of programs reached in non-transparent discussions between small groups of national government officials and the World Bank is a top down approach that can exclude important stakeholders such as local governments. Realising the importance of the involvement of stakeholders, Poverty Reduction Strategy Papers (PRSPs) now place a strong emphasis on making policies inclusive of all stakeholders. Reform policies promoted by the IFAs in third world countries have not been able to achieve their expected benefits in most of the cases. Realising the failure of the policies, the IFAs have considerably changed both their policy response and philosophy regarding third world countries. PRSPs have now become the basis for all debts/loans provided by the IFAs and are expected to be country-owned and involve the participation of all stakeholders.

There has been much attention about the importance of promoting good governance in third world countries but, in reality, the issues of good governance, stakeholder involvement and country ownership have not been addressed adequately. As a result, despite all the rescheduling and restructuring, economic development in third world countries remains elusive.

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Cite this article as

Azmat, Fara; Samaratunge, Ramanie. 'Poverty and deficits linger'. Monash Business Review. 2007.; Monash University ePress: Victoria, Australia. http://www.epress.monash.edu.au/. : 18–20. DOI:10.2104/mbr07038

About the authors

Fara Azmat

Ramanie Samaratunge

Dr Fara Azmat lectures at the Bowater School of Management and Marketing at Deakin University. Dr Ramanie Samaratunge is a Senior Lecturer in the Faculty of Business and Economics at Monash University.