Structural Adjustment is a term used to describe the policy changes implemented by the International Monetary Fund (IMF) and the World Bank (the Bretton Woods Institutions) in developing countries.
These policy changes are conditions (Conditionalities) for getting new loans from the IMF or World Bank, or for obtaining lower interest rates on existing loans. Conditionalities are implemented to ensure that the money lent will be spent in accordance with the overall goals of the loan.
The Structural Adjustment Programs (SAPs) are created with the goal of reducing the borrowing country’s fiscal imbalances. The bank from which a borrowing country receives its loan depends upon the type of necessity. In general, loans from both the World Bank and the IMF are claimed to be designed to promote economic growth, to generate income, and to pay off the debt which the countries have accumulated.
Through conditionalities, Structural Adjustment Programs generally implement “free market” programs and policy. These programs include internal changes (notably privatisation and deregulation) as well as external ones, especially the reduction of trade barriers. Countries which fail to enact these programs may be subject to severe fiscal discipline.
Critics argue that financial threats to poor countries amount to blackmail; that poor nations have no choice but to comply. Since the late 1990s, some proponents of structural adjustment such as the World Bank have spoken of “poverty reduction” as a goal. Structural Adjustment Programs were often criticised for implementing generic free market policy, as well as the lack of involvement from the country.
To increase the borrowing country’s involvement, developing countries are now encouraged to draw up Poverty Reduction Strategy Papers (PRSPs). These PRSPs essentially take the place of the SAPs. Some believe that the increase of the local government’s participation in creating the policy will lead to greater ownership of the loan programs, thus better fiscal policy.
The content of these PRSPs has turned out to be quite similar to the original content of bank authored Structural Adjustment Programs. Critics argue that the similarities show that the banks, and the countries that fund them, are still overly involved in the policymaking process.
Some of the conditions for structural adjustment can include: Cutting social expenditures, also known as austerity, Focusing economic output on direct export and resource extraction, Devaluation of currencies, Trade liberalisation, or lifting import and export restrictions, Increasing the stability of investment (by supplementing foreign direct investment with the opening of domestic stock markets), Balancing budgets and not overspending, Removing price controls and state subsidies, Privatisation, or divestiture of all or part of state-owned enterprises, Enhancing the rights of foreign investors visa-vis national laws, Improving governance and fighting corruption.