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SWP-735
Structural Adjustment Lending
Fahrettin Yagci
Steven Kamin
Vicki Rosenbaum
WORLD BANK STAFF WORKING PAPERS
Number 735
Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized
An Evaluation of Program Design
FILEo
loft
WORLD BANK STAFFWORKING PAPERS
Number 735
Structural Adjustment Lending
An Evaluation of Program Design
Fahrettin Yagci
Steven Kamir
Vicki Rosenbaum
The World Bank
Washington, D.C., U.S.A.
Copyright (© 1985
The International Bank for Reconstruction
and Development/THE WORLD BANK
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.
All rights reserved
Manufactured in the United States of America
First printing May 1985
Third printing April 1988
This is a working document published informally by the World Bank. To present the
results of research with the least possible delay, the typescript has not been prepared
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Bank accepts no responsibility for errors. The publication is supplied at a token charge
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The World Bank does not accept responsibility for the views expressed herein, which
are those of the authors and should not be attributed to the World Bank or to its
affiliated organizations. The findings, interpretations, and conclusions are the results
of research supported by the Bank;they do not necessarily represent official policy of
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Fahrettin Yagci, Steven Kamin, and Vicki Rosenbaum are staff members of the
Country Analysis and Projections Division of the World Bank's Economic Analysis and
Projections Department.
Library of Congress Cataloging in Publication Data
Yagci,
Fahrettin,
1944Structural
adjustment
lending.
(World Bank staff
working
papers
; no. 735)
Bibliography:
p.
1. World Bank.
2. Loans,
Foreign--Developing
countries.
I. Kamin, Steve.
II. Rosenbaum,
Vicki.
III.
Title.
IV. Series.
HiG3881.5.W57Y34
1985
332.1'532
85-9521
ISBN 0-8213-0545-X
ABSTAC
adjustmet
Structural
implementation
lmprovement.
of thes
operations , there
This paper attempts
to be explicitly
Special
emphais
frameworktfor SAL deelg.
of
(SAL) is
concepts,
Issues,
a comparatively
are ares
to identify
which need further
tbhs
areas
and indicate
addressed In the design of future
is given to the developmet
An analytical
techniques
new
improved the design and
AlthouSh the Bank has subetantlally
lnstrument.
the issues
lending
framork
and guidelines
SALs.
of an analytical
Is defined as a set
for
policy
analysis.
Recommendations are also maed to speclfy some of the components of the
suggested framework.
ACKNOWLEDGMENTS
The authors wish to thank Ram Chopra and John Shilling for
their guidance and suggestionsthroughout the study, and Erh-Cheng wva,
Vinod Dubey, Susan Bery, Paul
Isenman,
Michael
Lav,
Bahram Nowsad,
Country Analysis and ProjectionsDivision staff and the participantsat
various Bank seminars
for
their
comments.
TABLE01 COWriEWS
Page
l. INTRODWCTION...................
2. A SURVEY OF ADJUSTMENT
Introduction..
I
S.
..
.
.
5.........................
Sources of Internal and External Imbalance........................5
Modes of Adjustmentto External Disequilibriumo...o.........e.....6
Iopact of Stabilizationand StructuralAdjustmentPoliciesooosooo*7
Expenditure-Reduction
Policy
Expenditure
.
.
.
9
.
.
.
..
.
11
The Design of Consistent StructuralAdjustment Progra=s9**99**...14
Income DistributionEffects of AdjustmentPolicies............
6.17
Global Consistency of AdjustmentPolicies........................*18
3. AN EVALUATIONOF THE ANALYTICALFRANEWORK OF SALs................
20
Consistency
in Objectives..................
........
...........
RelationshipBetween Objectives and Instruments.,.......
........
Partialvs. General EquilibriumAnalysis
31
Lack of a Clear Medium-TermPermpecspecttie.e..
.................
e21
29
32
4. RECOMMENDATIONSTO IMPROVETHE ANALYTICALFRAMEWORKOF SAL*....34
Introduction.
...
o.o.@*s...
OOOO
0000000.34
MonitorableMediumrTermAction Program...........................35
AdjustmentDynamics
.....................
ExplicitAnalysis of Conflicts and Trade-offs....................38
Guideline for Monitoring and EvaluatingSAL Programs............39
ResearchRequirementsof an AnalyticalFramework
for SALDesign. 00
40
Issue-Oriented
Research
41
Policy Modelling...
43
Main Features of the SuggestedModelling Franework.....
*e6 46
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1.
This
Structural
study
purposes
IrAESDUCaI
to
evaluate
Loan program.
Adjustment
the
A variety
the SAL program have been written since its
design
of other
inception
of
the
Bank's
evaluations
of
in 1980, but these
have largely concentrated upon the recipient countries' success in
implementing the programs.
By contrast, this study brings a more
analytic perspective to bear upon developing a unified conceptual
framework and designing consistentadjustmentprograms.
The purpose of SALs has been to support the implementationof
policies and institutionalchanges necessary to modify the structure of
an economy so that it can maintain both its growth rate and the
viability of its balance of payments in the medium-term. Some 28 SAL
operations
have
met with
varying
been
to
date
of success.
/
approved
degree
in
16 countries, and these have
SALs are comparativelynew instruments,and the Bank is still
gaining experience in their design and implementation. Despite this,
SALs have had considerable success in a number of countries, both in
design and implementation. However, some issues have been identifiedin
this study that need further attention in SAL design. These issues can
be sumarized as follows:
(1) Lack of a well-elaboratedmediumr-term
perspective Is a coimon issue observed in a large number of SAL
programs.
(2) There
are potential conflicts among some of SAL
objectivesand policy instruments. They are not sufficientlyelaborated
1/ See 'StructuralAdjustmentLending ProgressReport", June 6, 1984 (R
84-150).
-2-
and the trade-offsare not carefullyexploredin SAL program. (3) SALs
are
multlple
links
directional
and multiple
objective
instrument
and Interactions
established.(4) Partial
are
analysis
programs.
only
informally
The multiand loosely
dominatesSALs' policydesign. This
does not allow one to trace the generalequilibrium
Interactions
in the
economythatwould be initiatedby the recommended
policies.
These issuesindicatethat an articulated
analyticalframework
has not yet been developedin the Bank for the policyanalysisof the
SAL operations
which is comparableto thosethatsupportproject
of the Bank or the stand-by
arrangements
framework, we mean an integrated
guidelines
for
policy
set of concepts,
analysis.
is clear.
framwork
of the Fund.
By providing
a unified
and a shared vocabulary
to analyze adjustment
framework would
organize
systematic
help
thinking,
leading
our
views
to better
By an analytical
issues,
The benefit
lending
techniques
of developing
set of tools
issues,
and
such
a
and concepts
a well thought-out
and facilitate
clear
and
SALprograms.
To help develop such a framework and to Improve the design of
SALs, recommendations
the need for
monitorable
are also made.
a policy-focussed
actions;
mediuar-term perspective
(b) provide
a list
needed to improve our understanding
a checklist
of possible
need further
set
of
program;
key
These recommendations
conflicts
of areas
(a) stress
as a guide for
of further
research
dynamics; (c) present
of adjustment
among objectives
and instruments
that
attentionin SAL policydesign;(d) pointto the need for a
guidelines
regarding
(e) Indicate
relationships;
the
the need for
and
(f)
draw
monitoring
researching
attention
and evaluation
of speciflc
to
the
of
SAL
Issues
and
usefulness
of
-3 -
simulating the impact of suggested policieswith an economy-widepolicy
model.
These recommendationsare naturally not sufficientto define in
detail the type of analytical framework the Bank needs for SAL design.
However, they would constitute some of the main components of such a
framework and indicate the types of features it would contain. In the
recommendations,
issues,
special
relationships
medium-term
and targets.
response
It
and
emphasis
was
trade-offs
coefficients
placed
upon
and analyzing
of
the
researching
the
short-term
main macroeconomic
for
and
variables
is also suggested that policy modelling would serve as
a unifying element in defining an analytical framework by providing
basis
key
linking policy instruments to
a
performance indicators,
estimating trade-offs, and simulating the effects of the recommended
policies in an economy-widecontext. It is stressed, however, that the
role of modelling and its expected benefits should not be overstated.
The concept
of an analytical
framework,
the main theme of this
study,
is
much wider than a modelling framework. The latter is expected to assist
those engaged in a policy dialogue in testing the consistencyof their
judgments in an economy-wideframework and exploring the implicationsof
alternativepolicy packages being considered.
Our evaluationis based on (a) an in-depth study of a number of
SALs; and (b) a survey of adjustment issues. Initially,our intention
was to study all SAL programs prepared in the Bank.
infeasible within the time constraint we worked.
This proved
After reviewing a
number of SALs we had to reduce the sample size to three countries
(Philippines,Turkey and Malawi) for more detailed evaluation. Our
-4-
observations
depth,
therefore
apply mainly
to the three
SALs we have studied
in
but are also appropriateto others we have examined less closely.
We have
The purpose
of
also
this
done
a literature
survey
is
to
survey
identify
the
of
adjustment
major
issues.
discussions
and
controversieson adjustment policies and to help establish criteria to
evaluate the SAL programs. This survey is far from being exhaustive.
It includes only the adjustment issues which are particularly relevant
for the SAL programs.
One limitation of the study should also be mentioned. The
evaluation we present in this paper focuses largely upon the policy
design of the SAL programs and only touches upon the negotiation,
implementation,supervisionand other aspects of these operations.
The plan of the
vrariety
of the
structural
issues
adjustment
paper
in the
policies.
is
as follows.
literature
Section
most relevant
Section
3 evaluates
2 summarizes a
to the design
of
a number of SAL
operations from a technical and analyticalpoint of view, while Section
4 makes recommendationsto improve
adjustment
policy
specific case
evaluation
studies
detailed
packages.
studies
of
The
SAL design
the
-construction
of
structural
appendix includes three countrywhich
formed
the
core
of
our
effort; this was, however, supplemented by less detailed
of a variety
version
of other
of the survey
SAL*.
This
of adjustment
is
followed
issues.
by a longer,
more
- 5-
2.
SURVEYOF ADJUSTIJ? ISSUES I/
Introduction
The
past decade has seen the development of persistent,
unviable balance of payments deficits on the part of many developing
countries.
There is a
growing belief that these problem
are not
amenable to narrow demand managementpolicies; interesthas shifted from
the app]Licationof short-term stabilizationpolicies to more gradual
structural adjustment programs.
focused upon
se.
the
proper
design
Little academic research has been
of
structural
The following pages are intended to
adjustment
program
highlight
those
per
issues
currently being discussed which are especially pertinent to the
construction of structural adjustment programs. A discussion of the
sources of internal and external imbalance is followed by a sunmary of
the different broad modes of adjustment identified in the literature.
Next, the potential impacts of specific adjustment and stabilization
policies are focused upon, while the following section discusses the
overall
design
of
consistent, effective structural adjustment
prograus. Finally, potential distributionalimpacts of these programs
and their consistencywith global economic trends are touched upon.
Sources of Internal and External
Considerable
controversyattaches to whether the past decade's
marked payments problems are
I/
This section
appendix.
is
Imbalance
attributable to external shocks or
a summary of the
detailed
survey
presented
in the
-6-
inappropriatedomestic policies. The former include adverse term
of
trade changes, declines in export volume demanded, and more recently,
rises in the interest rate (Mitra 1983). The latter encompass overlyexpansionaryfiscal and monetary policy, policies reducingmicroeconomic
efficiency through introduction of various distortions, and policies
producing disincentives for the export sector, notably overvalued
exchange rates and high cost protection policies. There appears to be
some consensus in the literature that the weight of external shocks has
been more important
been
especially
shocks.
not
clear
in payments
important
As structural
how useful
imbalances,
in
the
adjustment
adjustment
programs
an aggregate
though
are
factors
response
to
have
external
country-specific,
characterization
design. In any event, care should be taken
the specific caLses of imbalances -
internal
will
it
be
to
Is
SAL
in SAL design to identify
the internal/externaldistinction
.er se may be less crucial.
Modes of AdJustment to External Disequilibrium
Three broad adjustment modes have been identified in the
literature. (1) Expenditure -reduction involves reducing domestic
absorption in relation to aggregate supply.
While in principle this
could be achieved through either increases in output or increases In
savings (at constant output), in practice expenditure-reduction
policies
are usually associated with decreases in output, investment, and hence
future growth.
(2) Expenditure-switchingpolicies attempt to shift
output from the home goods to the tradeable goods sector by promoting
exports and import - substitutes. While entalling les
costs than the
expenditure-reduction
strategy, it is likely to take longer to achieve
results.
(3) The
final adjustment mode, external financing, is
considered appropriate for
transitory payments imbalances and in
conjunction with other adjustment modes, but not for persistent,
fundamentaldisequilibria.
Research on the incidence of adjustmentmodes across different
countries indicates that while outward-looking countries suffered
greater external shocks, they were better able to implement expenditureswitching policies with less reliance on external financing or economic
-traction (Balassa 1983).
countz
This stemmed from the outward-looking
' less active discriminationagainst the tradeablessectors, so
that they could more strongly demonstrate the flexibility needed to
respond to severe external shocks.
Impact of Stabilizationand StructuralAdjustmentPolicies
In the preceding pages, the terms stabilizationand structural
adjustmenthave been used recurrently,but no clear distinctionhas been
drawn between them. We would like to draw this distinctionmore closely
in order to use it to organize our thinking about the issues and our
discussion of adjustment policies. In this sense, 'stabilization"and
"structural adjustment" should be thought of as abstract concepts
defining opposite poles on a range of different policy approaches,
rather than specific policy packages per se.
While the Fund programs
are traditionallyreferred to as "stabilizationprograms" and Bank SALO
as "structural adjustment programs", this organizational distinction
does not correspond to the conceptual distinction we are making here.
output,
The Fund programsprovidefor a varietyof measureseffectitng
which might be thought of as
employmentand resource re-allocation
and
measures.1/ Moreover,while stabilization
adjustment"
"structural
structuraladjustmentare highly dissimilarin some respects,they
complementeach other in the design of completepolicy packages,and
has resultedin the emphasison effectiveBank/Fund
this complementarity
collaborationin designingSAL and standby arrangements. In this
and
the boundariesbetweenstabilization
collaboration
organizational
structural
adjustment
become blurred.
and structural
betweenstabilization
The conceptualdistinction
adjustmentis composedof two relatedelements. The first relatesto
programis
the objectiveof the actions: the purposeof a stabilization
to correcta balanceof paymentsdeficit,while structuraladjustment
towardpaymentsdeficitreduction,the resumption
works simultaneously
of structuralchangesneeded to
of output growth,and the achievement
problems. Secondly,to this
preventfuture paymentsand stabilization
distinction in
objectives corresponds a
crucial distinction in
programstake the parametersdetermining
methodologies.Stabilization
as given, and attemptsto
an economy'sresponseto policy instruments
manipulate these policy instruments exclusively to achieve its
stabilizationobjectives within relatively short time horizons.
primary
adjustmentprogramnot on'ymanipulates
a structural
Conversely,
policy
1/
instruments,
but exploits
a longer
time frame to increase
the
of the Fund programssee (Nowzad1981, 1983 and
For a description
1984) and Robichek (1984).
-9-
responsiveness
of the stabilization
objectivesto those instruments.
For example,a stabilization
programmay dependlargelyupon an exchange
rate devaluationto correct a BOP problem, relyingexclusivelyupon
exporterresponseto higherexportprices(in domesticcurrency)to turn
aroundthe trade deficit. By contrast,a structuraladjustmentprogram
night combinea devaluation
with decreasedtariffs,the eliminationof
price/wagecontrols,and an export creditfacility,all of which would
enhancethe exportsector'sresponseto the originaldevaluation.
Expenditure-Reduction
Policy
Withinthismode,the majorstabilization
toolis a decreasein
domesticcreditcreationto reducethe currentaccountdeficitand also
to containinflation. Those adheringto the pure absorptionapproach
would see this policy leadingto declinesin final demand but not in
output, leadingto an improvedcurrentaccountwith relativelylittle
cost in teromof incomeand growth(Sharpley1984). Dell (1983)points
out that
this
declining
domestic demand is automatically
export)
must
presumption
underlie
of easy
any
stabilization. On the
flexible
exclusively
other
hand,
expenditure-switching
offset
by increased
demand-focused
those
of
(as
sales
for
approach
to
a more structuralist
inclination
stressthe inflexibility
of deriveddemandsfor imports,as
well as the short run inabilityto producedomesticsubstitutes;they
would expect
import declines
considerably
greater
Cline,
and trade
balance
improvement only after
output contraction(Schydlowsky'scomments on
in Cline and Weintraub1981).
Anotherstrandof criticismin the literaturefocusesupon the
inflationary
side-effects
of
these
stabilization
policies,
their
-
10
-
effectiveness
aside. Taylor (1981)and Bruno(1979)both presentmodels
of monetarycontractions
which raiseinterestcostson workingcapital,
leverup prices,and reduceoutput. Dervis'commentson Taylor (1981),
however, point out that these inflationaryeffectswill usually be
short-termphenomena;in general,empiricalevidencedoes not supportan
actual negative correlationbetween the money supply and inflation
(Cline1983).
Perhaps a more problematicaspect of conventional
absorption
reductionmeasuresis theirfocusupon investment
reduction;this limits
future outputgrowth and hindersattemptsto drift relativesectoral
capacitiestowardtradeablegoods.
There are varieties of structuralrigiditieswhich force
attemptsto reduce the output/absorption
gap to rely exclusivelyupon
costly output and investmentreduction:bottlenecksand rigidities
inhibitingsectoralshifts, ineffectivetaxationsystems and public
sectoroperations
which limitpublicsavings,and underdeveloped
capital
markets and
financial regulations limiting private savings
mobilization.Structuraladjustmentpoliciesaddressing
bottlenecks
and
sectoralrigiditiesare discussedbelow,while those associatedwith
public sector efficiencyand resourcemobilizationare of a rather
technicalnatureand have receivedless attentionin the stabilization
literature.
Regardingthe capitalmarket rigidities,
a widelyrecommended
strategyfor increasingprivatesavingshas been liberalization
of the
financialsector(McKinnon1973,Shaw 1973). This is hopednot only to
raisereal interestrates,encouragesavings,and betterselectfor high
-
11
-
return investments,but also to reduce intermediation
costs in the
bankingsector by introducingincreasedcompetition. Foxley (1980),
-however,points out that large lending rate increasesmay increase
workingcapitalcosts,raiseprices,and decreasesome sectoraloutputs
in the short term. Whetheror not increasesin depositrates increase
private savings rates, they are also likely to divert savings from
informalto more formalcreditmarkets,at least temporarily
disrupting
the flow of workingcapitalto sectorstraditionally
dependentupon the
curb markets for financingand hence causingtransitoryoutput losses
(Taylor1981,Wijnbergen1982).
Expenditure
Switching
tool for expenditure
switching
The most prominentstabilization
has been the devaluation
of the exchangerate. This actionis intended
to raise the domesticcurrencyprice of tradeablesvis-a-vishome goods
and hence shift productiontoward the former (and to lesser degree,
demandtowardsthe latter).
impactsof a devaluation
is its
One of the most controversial
potential,dependingupon a varietyof conditionsin the economy,to
raise domestic prices and hence underminethe real effects of the
that In
nominalexchangerate change. Bird (1984)notes the possibility
to
addition
a
direct
inflationary
prices,
the improved trade
reserve
inflows
prices.
contraction,
This
balance
impact
through
increased
causedby a devaluation
could induce
which would expand the money supply and thereby
could
be sterilized
through
however; and in any event,the full
a
corresponding
real
import
devaluation
raise
credit
can be
- 12 -
protectedby adoptionof a "crawlingpeg"which depreciates
the exchange
rats at the rate of inflation.
A key determinant
of the effectiveness
of the devaluation
will
ba the supplyresponseof exports. While evidencepointsto fairlyhigh
responsiveness(Cline 1983), this will depend upon the capacity
utilizationof the country'sexport sector and the gestationperiods
ssociatedwith additionalinvestments
or crop expansion.The response
of importdemandand import-substitution
supplyis not expectedto be as
importantto trade deficitreduction. First, the effectof a currency
devaluation
in the contextof wide-spread
QRi is to lowerthe profitsof
Importlicensees
more thanto raiseImportpricesfor consumers(Krueger
1981) Secondly,decadesof tariff protectionhave alreadysuppressed
the importation
of most easily
producible
exists
in the short-term.
for further
substitution
The thrust
devaluation
focuses
of
le
the
most recent
upon its
considered
impacts.
real
a variety
of hypotheses
expansionary,
It could do this
balances,
credit,
It
criticism
mdiuu-torm
possiblestagflationary
sideeffects.
potential,
goods, so that littleleeway
suggest
by (1) raising
exchange
effectiveness
In addition
may achieve
and activity
of
that
to its
while
offsetting
the price
level,
rate
than upon
inflationary
devaluation
is
contractionary
thus lowering
(Dornbusch1973), (2)
lowering
aggregatereal incomewhen the tradebalanceis initiallyin deficitand
incom gains to exporters are offset by income losses of import
consumars(Krugmanand Taylor 1978),and (3) raisingprofitsas prices
Increase relative to
nominal wages and hence diverting incomes from
high-consumingworkers to low-consumingcapitalists
(Taylor
1981),
- 13
-
These are theories of short-run effect, however, and should be viewed
more as factors which could cause overkill through credit contraction
than as important independentfactors in themselves.
The structuraladjustmentpolicies associatedwith expenditureswitching are intended to enlarge the elasticities of export supply,
import demand, and
import substituting supply with
respect to
devaluation, as well as to more directly shift resources into the
tradeable goods sector.
Among the most important of these is trade
liberalizationto remove the import barriers raising costs, lowering
productivity,and producing incentive biases against exports (Krueger
1981). While likely to be highly beneficial in the long run, Krueger
notes that a decrease in protection may cause transitory losses of
activity if newly profitableindustriesneed time to expand output while
others lose their viability. Moreover, if no strong export response is
forthcoming, increases in imports could offset the intended trade
balance benefits of devaluation. Finally, the unificationof the tariff
rates in liberalizationschemes may involve raising tariffs on imported
capital and intermediategoods, with according adverse impacts on costs
in some sectors.
A second major structural adjustment strategy associated with
expenditure-switching is
price
distortions,
efficiency,
increase
control liberalization to
and
eliminate
remove
sectoral
discrimination. Again, certain transitionproblems may result. Foxley
(1981) notes that after prices have been frozen for some time, unstable
expectationsmay generate price overshooting,declinesin the real wage,
and fluctuationsin output - oligopolisticelements in the markets would
delay the adjustmentperiod.
- 14 -
The importance of liberalizingmarkets notwithstanding,more
interventionisttools such as export subsidies and/or multiple exchange
rates may be appropriate when certain distortions cannot be readily
reduced, or when response elasticities differ across sectors (Bird
1984).
For example, it may be desirable to devalue the exchange rate
for
export
is
highly
earnings
more than
inelastic
and
that
would
for
import
promote
payments
if
import
contractionary
demand
expenditure
leakages. While lacking the destabilizingpotential of liberalizing
measures, however, these policies are subject to potentially high
administrationcosts and difficultiesin implementation. They tend to
develop vested interests opposed to their eventual removal, and in the
case of export subsidies on value-added, are likely to violate GATT
rulings and invite hostile reciprocation.
Another
interventionist strategy would
be
the
specific
targeting of investment to the export and import-substitutingsectors.
This may be justified by the need to break bottlenecks preventing
expenditure-switchingsectoral shifts, as well as by the failure of
poorly developed capital markets in many developing countries to guide
resources to the most profitable areas.
As a long term strategy,
however, it may conflict with the goals of privatizationand market
liberalizationembodied in many structuraladjustmentprograms.
The Design of ConsistentStructuralAdjustmentPrograms
While
analyses of
specific stabilization and
adjustment
policies abound, few guidelines exist to help design a structural
adjustment program per
se
i.e., a
set
of
consistent mutually
- 15 -
reainforcingpolicies. One recent example of this has been the "real
economy" approach proposed by Killik, Bird, Sharpley, and
Sutton
As they point out in their article, this approach is very
(1984).
similar in spirit to World Bank SALs:
the applicationof a multiplicity
of different policy tools to enhance efficiency, build up institutions,
promote resource mobilizationand correct paymentsimbalances. However,
they do not propose a
formal framework to determine objectives,
appropriate time phasing, and construct/evaluateoptimal, consistent
policies.
Turning to the objectives of structural adjustment programs,
most discussions include the following elements: (1) the correction of
balance of payments imbalances, (2) the elimination of distortions and
promotion of microeconomic efficiency, (3) the reduction of high
inflation rates, (4) the protection or resumption of output growth, and
(5) minimizationof the cost of adjustmentto the poorest (Killik, Bird,
Sharpley and Sutton 1984; various World Bank documents; Williamson
1983). However, little attention in the literature has been focused
upon the assigning of relative weights to those potentiallyconflicting
objectives, nor ways of adjusting these weights to specific country
circumstances.
There appears to be substantial controversy regarding the
relativeappropriatenessof "shock treatments"and gradualistapproaches
to adjustment. Analysts of a structuralistorientation such as Killik
maintain that gradualism is to be preferred because it allows rigid
structuralparameters time to adjust, as well as because it avoids the
welfare losses of harsh, rapid dislocation. Conversely, Krueger and
- 16 -
others recommend a
non-gradualistapproach because it
limits
opportunities
for the developmentof politicalresistanceto program
policies. Moreover,Nowzad (1984)pointsout that a seriesof shorter
term programsmay provide more flexibilityover time than a single
longer term program. Clearly,the appropriate
point on this trade-off
must be determined
on a countryby countrybasis.
A relatedissue is the optimaldegreeof externalfinancingof
a deficit: the longer the adjustmentperiod,the greaterthe role for
financing.Conversely,
factorsspecificto the cost and availability
of
externalfinancingwill contributeto the determination
of the optimal
adjustment period.
Relatively little in the literature focuses
specificallyupon optimal financinglevels for structuraladjustment
(exceptSelowskyand Martin 1984). However,recenttheoretical
work on
the determination
of'solvencyand liquidityconstraints
for developing
countriesmay provide rough guidelinesin this area (Sachs 1983,
Simeonson1984).
An implementation-oriented
issue in the design of structural
adjustmentprogramsis the number of policyactionsto be undertaken.
While it is considereddesirableto take action in as many different
areas as possible, too large a
"wish list" may overly burden
and monitoringcapacities- the appropriate
pointon this
administrative
tradeoffwill vary acrosscountries.
The core of a formal frameworkfor SAL design should be a
frameworkto evaluatethe impacts of differentadjustmentpoliciessuch a frameworkwould incorporatethe elasticitiesof responseof
policy variables to policy actions, and would also account for
- 17 -
interactioneffects between policies in a consistent,simultaneous
model developedby Lal (1984)to analyze
manner. The real/financial
structuraladjustmentissues representsan effort along these lines.
this frameworkmust take responselagsinto accountso that
Furthermore,
consistentset of policiesmay be devised. Cline (1983)
a dynamically
points
out that
the time path of optimaladjustmentis a high priority
for future research. Khan and Knight (1981) developeda highly
aggregatesimulationmodel to study dynamicadjustmentpaths, and this
is a step in the rightdirection.
Effectsof AdjustmentPolicies
IncomeDistribution
The role of distributionalconsiderations
in
structural
adjustmentobjectivesis ambiguous,but it would seem desirableto at
the least attemptto avoid large movementstowardgreaterinequality.
While littleconsensuson the net effectof adjustmentprogramsexists,
impacts
the followingsummarizessome of the potentialdistributional
noted in the literature.
Much of the work in this vein focuses upon the functional
income distribution. Ahluwaliaand Lysy (1981) point out that the
policy will dependpartly upon
stabilization
impact of contractionary
the elasticity of substitutionof capital and labor, with low
increasinglabor'sshareas outputdecreases.Usinga less
elasticities
orientedapproach,Taylor'smodelsoftenassumea shift
neo-classically
of income toward capitalistsas increasesin prices (caused by a
devaluation,largely)combinewith fixed nominalwage to lower real
worker incomes. However, as Omatundeand Salop (1980)point out, a
-
18
-
successful devaluationmay result in a decrease of the wage relativeto
tradeables' prices, but
an
increase relative to
non-tradeables.
Moreover, a lowered real wage will increase employment and potentially
improve the functional distribution;this will be more true, depending
upon the labor-intensivenessof the stimulatedexport sector. Wage and
tariff liberalizationpolicies which reduce capital-intensivebiases in
investmentmay have long run beneficialeffects on distributions.
In developing countries, the key inequalitymay not be between
capital and labor so much as between different categoriesof capitalists
and workers.
Omatunde and Salop (1980) note that credit restraint
programs may hurt small informal sector firms and the rural sector.
Increased taxationis likely to fall heaviest upon importers,exporters,
and public/formalsector workers. On the other hand, widely recommended
actions to cut consumption subsidies and raise government charges may
be detrimentalto the poor, regardlessof income source.
GlobalConsistency
of AdjustmentPolicies
In addition to ensuring the internal consistencyof structural
adjustment policies, SALs should ensure the consistencyof their policy
recommendations with trends in world export and capital markets.
Traditional analyses often regard individual countries as price takers
in world markets (see Ahluwalia and Lysy 1981, for a notable exception),
but
some countries
will
inevitably
some commodities. SAL design
have
should
substantial
include
market
an assessment
shares
of
in
those
export categorleswith the greatest expansion potential. Moreover, the
policies
of
SAL programs across countries should be made mutually
-
consistent, so
that
19
markets for
-
particular commodities are
not
accidentallysaturated by too many expanded supply sources, or so that
simultaneousabsorption-reductionpolicies in too many countries do not
depress world import demands.
The global analysis and projections
associatedwith the WDR may provide a useful point of departure for this
approach.
There is as yet little written on these issues, partly
because they are inherently difficult to treat, but with increasing
numbers of countries undertaking adjustment policies, it should attract
researchinterest.
-
3.
20 -
M EVALUATI0OOF TEE MAhLTrICALFnEM
K OF SALs
Introduction
Section 2 summarizeda variety of issues currentlybeing
discussedin the literature
which are especially
pertinentto structural
adjustment
policies. In the lightof thesediscussions
and on the basis
of our in-depth
an evaluation
examination
of a number of SALs, this
sectionpresents
of the design of SAL programs.
SALs are
a
creative
and
innovative
lending
instrument.
Experience indicates that they have contributedsubstantiallyto
structuraladjustmentin a numberof developingcountries.The strength
of the SAL operations
lies in theircomprehensive
approachto structural
adjustmentand their emphasison medium-term,supply-side,
micro,and
real
issues
sharper
traditional
of the
short-term,
adjustment
demand-side,
stabilization
In the last
process
macro,
enables
opposed to
and financial
the
relatively
focus
of
the
programs.
four years,
some experience
the Bank in the design and implementation
experience
as
has been accumulated in
of adjustment
us to make an evaluation
programs.
This
of these operations.
The
evaluationpresentedhere will be limitedin scope: it will be related
only to the technicaland analyticalaspects of a number of SALs.
Neitherthe suitability
of the suggestedpolicychangesin the specific
cases, nor the effectivenessof these measures are included in the
evaluation.The generalaim is to indicatewhere the Bank can improve
the policyanalysisof the SAL operations.
-
21 -
In examining the analytical structure of the SAL documents for
Turkey, Philippines and Malawi in-depth and for some other countries
less closely, we identifiedsome issues that need further attention in
policy analysis. These issues are certainly known to those who were
involved in the SAL operations. Lack of an establishedpolicy framework
and the time constraint under which the programs are completed, are
important elements which contributed to the insufficiencyof attention
these issues have received.
The purpose of this evaluation is to
highlight these issues and make some recommendations.
Consistencyin Objectives
SAL operations are multiple-objectiveoperations. They are
formulated around various economic, institutionaland social objectives
both at the macro and micro level. This makes interdependencebetween
objectives an important issue. Some objectives are complementary,but
others are partially conflicting. Explicit trade-offsbetween partially
conflicting objectivesand the degree of complementaritybetween others
are not always made clear
of policies
in the documents,
which might fail
leading
to meet some of
to recommendations
the objectives'
to the
extent originallyenvisioned.
In the case of conflictingobjectives, the question is whether
the conflict
is
a transitory
one and could
be resolved
through
time
without many medium-term costs, or it persists for a longer period with
significant costs attached to sub-optimal policy choices.
would the
objectives?
conflict
last?
What is
Would the severity
the
cost
in terms
of the foregone
objective
How long
of
foregone
impair
the
-
22
-
credibilityof the package of adjustmentpolicies and lead to the
breakdownof the program.
Some conflictingobjectivescould be
reconciledat a lower level of income. What is the level of income
whichwould reconcilethem? Would it be politically
acceptable?
These questionsneed to be explicitlyaddressedin a multiobjective program and interdependenceand trade-offsneed to be
quantified
as far as possible.
The treatmentof these issues in SAL documentsrequiresmore
attentionand rigour. In some cases they are not directlyaddressed.
In othersthey are only casuallyand superficially
treated.
The areas of potentialconflictin the threeSAL operations
we
have examined,are the following.
(1) Trade liberalization
vs. reductionin balanceof payments
deficit/reduction
in budget deficit.
Trade liberalizationis a
significant
part of the Turkey and Philippines
SALs (not importantin
Malawi,where QRs are negligibleand tariffsare low). This involves
reductionin tariffsas well as the elimination
of QRs (averagetariff
reduction was also suggested in the case of Kenya, Korea and
Thailand). If not supportedby appropriatesupplementary
policies,
tariff reduction reduces governmentrevenue and increasesimports,
which, in turn, increasesboth the budget deficitand the balanceof
payment deficit, indicating short-run inconsistencyamong three
objectivesset in the SAL documentsof two countries.1/
1/ If trade liberalization
involves replacement
of QRs with tariffs
(Kenya, Panama, Pakistan, Ivory Coast) such a conflict would
naturallynot arise.
-
The
ways.
be
23 -
inconsistency can be partially reconciled in
several
(a) Exportsand governmentrevenuefrom non-tariffsourcescould
increased to
such an extent
that balance of
payments deficit
and budget deficit are reduced despite the adverse effects of tariff
reduction. 1/
(b) A compensating exchange rate adjustment may be
uundertakento accompany tariff reduction. This would eliminate the
cheapening of imported goods created by tariff reduction and discourage
imports made available by lifting of QRs.
Although tariff rates are
reduced, exchange rate adjustmentwould increase the domestic currency
price of imports and the tariff revenue.
(c) Reconciliationcould be
achieved at a lower level of income brought about by reducing domestic
absorption.
The potential conflictbetween trade liberalizationand balance
in budget and payments could be partially or totally reconciled by one
or a combinationof (a) - (c). There is not a clear discussionof these
issues in the SAL documents. Although a combination of (a) -
(c) is
adopted in SALs, the issue was not explicitlyaddressedand the relative
merits of the choices do not appear to have been carefullyconsidered.
(2)
Stabilization vs. growth.
In all three countries
structural adjustment is combined with stabilization. SAL operations
are prepared in conjunction with standby arrangements. Stabilization
programs are designed to deal mainly, but not exclusively, with
imbalance between aggregate demand and supply created by internal
mismanagement or external shocks or both.
Such an imbalance can be
1/ In the case of Philippines, the conflict was carefully considered
and increase in indirect taxes were recommended to compensate the
potential loss of revenue.
-
corrected
which
run,
by adjusting
is the focal
under standby
on the
side
demand or supply
points
or both.
of SALs, typically
arrangements,
of demand,
24 -
takes
the main burden
implemented
through
Supply
time.
adjustment,
In the short-
of adjustment
reducing
the
may fall
growth rate
of
money supply by controllingthe Central Bank's domesticassets. 1/
With the contractionof demand, capacityutilizationand output
tend to decrease if not( compensated by an autonomous increase in
production such as an increase in agriculturaloutput due to favorable
weather conditions. In addition, the availabilityof credit for both
working and fixed capital would decrease. This increases costs which
may discourage new investment.
Supply adjustment in a contracting
economy with decreasingnew investmentwould be severely limited.
The
conflict is
evident in
the case of Turkey.
The
manufacturingvalue added and GDP declined in 1980, the first year of
the adjustment,but began growing thereafter(Table 3). Investmentalso
declined in both 1980 and 1981. However, growth in investment resumed
in 1982.
The conflict between stabilizationand growth is naturally a
transitory one. After a while, positive effects of stabilizationwould
emerge and both production and investmentwould resume positive growth
rates.
Efficiency in production and productivity of investmentwould
improve. The long-term benefitswould exceed short-termcosts. But the
length of the contradictoryperiod and the economic and social costs of
1/ The changes in the traditional Standby and SAL programs and the
growth of effective collaborationbetween the Bank and the Fund in
recent years make the distinction between stabilization and
adjustmentmore difficult.
- 25
-
stabilization in that period are of utmost economic and political
importance.
The SAL documents do not provide an explicit analysis of
the
reconciliationof the need for long-term development with reasonable
stability. They do not explore the trade-offs and alternatives. An
explicit treatment of these issues would not only improve policy
analysis
of
Bank,
the
involved
difficulties
but
also
in the
forewarn
implementation
the
governments
about
of the programs.
the
in
This,
turn, would avoid the possible disillusionmentwith the results and
consequentbreakdown of the programs.
The
relationship between stabilization and growth receive
little analysis in SAL documents mainly because the stabilizationfalls
under the organizationaljurisdiction of the Fund.
The staff of the
Bank and the Fund, however, occasionally differ on the speed of
stabilization and adjustment. A policy modelling framework which is
capable of siwulating the policies and estimating the trade-offs would
be very useful in the dialoguebetween the Bank and the Fund staff.
(3)
Privatization
vs.
liberalization of
interest
rates/increasein tax revenue. Privatixationof the economy is another
comon
objective
the share
in the SAL. un4er
of private
sector
in private investment. 1/
study.
in production
This
through
involves
an increase
a substantial
in
Increase
This objective is set simultaneouslywith
liberalizationof interest rates and an increase in tax revenue, which
both tend to curb private investment. Liberalizationof interest rates
1/ Privatization often means
private sector (Panama).
selling
off
soue public
firms
to
the
-
26 -
takes for granted that a sufficient array of investment opportunities
promising high rates of return will always exist; if it does not,
interest rate reform can result in a seriously reduced investmentrate
in the short-run (the medium-termeffect of the reform would, obviously,
be favorable). An increase in the tax revenue also reduces investment
In the private sector by reducing the investablefunds.
The conflict between objectivesis again evident. In the case
of Turkey, the conflict was tried to be solved by recomending a
revaluationof physical assets. By reducing the taxable income through
an increase in nominal depreciationallowances, asset revaluationwould
raise the after-tax profits and the funds to be invested in the private
sector. However, this recommendationcontradictswith the objective of
increasingtax revenue.
Another policy recommended for Turkey is a reduction in the
intermediationcost of the banking sector by eliminatingthe transaction
tax of 25 percent on credits. The transaction tax was reduced to 15
percent in 1981 and 3 percent in 1984. But the oligopolisticconditions
in the financial sector prevented the gains in the intermediationcost
from being passed on the borrowers. This policy recommendationalso
contradictswith the objective of increasingtax revenue.
The conflict among privatization, liberalization of interest
rates and an increase in tax revenue is reflected in the economic
performance of Turkey In
decontrolled in 1981.
the SAL
The
period.
Interest rates were
share of private investment in total
investment declined from 48.8 percent in 1979 to 40.9 percent in 1983.
The tax/GNP ratio also declined from 20 percent to 17 percent in the
same period.
- 27 -
The analysis of these issues in the SAL documents is not
formal. The trade-offsand the possible means of reconciliationare not
addresseddirectly and rigorously.
(4)
Increasing/decreasingsubsidies vs. increasing public
sector surplus.
Direct export subsidies in various forms have been
recommended for Turkey and the Philippines to complement a realistic
exchange rate policy. 1/ They were suggested, however, on a temporary
basis to soften or eliminate the anti-exportbias inherent in the system
of import protection. Following decreases in import protection, export
subsidiesneed to be lifted gradually.
Granting direct export subsidies is in conflictwith achieving
higher public sector surplus.
Eliminating some subsidies may also
conflictwith increasingpublic sector surplus. Decontrollinginterest
rates in Turkey is one such case. Public firms are the main beneficiary
of interest subsidies in Turkey (92 percent of all interest subsidies
were granted to public firms in 1981). 2/
subsidies would increase the
surplus.
cost and
Elimination of interest
reduce the public sector
In some situations, for example Turkey, subsidy reductions
might be more importantand it overrides the second objective.
(5)
Stabilization vs. employment and income distribution.
Although the programs frequently include measures which directly affect
employmentand income distribution,SALs do not take explicit account of
1/ Direct export subsidies were also recommended for Ivory Coast,
Kenya, Mauritius, Senegal, Pakistan, Thailand, Panama and
Yugoslavia.
2/ See Yagci (1984), Chapter 3.
- 28 -
distributionalconsequencesof their policy measures. Transitory
conflict may exist between employment/income
distributionand other
objectivesof the SALs in the followingareas. All threeprogramsaim
to increaseexportsmainlyby exchangerate depreciation.This policy
shifts resourcesfrom non-tradables
to tradables. Since non-tradables
are more labor-intensive,
export-promotion
tends to reduceemployment.
This may be compensatedif exportablesare more labor intensivethan
importables.
While decreases in output and investmentadverselyaffect
employment,the effectsof shiftinginvestmentto more labor-intensive
sectorsand restructuring
factorpricesare favorable.
Removal of subsidiesand liberalization
of prices which are
included in three SALs may also create adverse effects on income
distributionbecause they are sometimesdirectlyrelated to the low
incomeproducersand consumers.
The conflict is evident in Turkey's adjustmentexperience.
Duringthe fouryears of structuraladjustment
in Turkey,inflationfell
from 103 percentin 1980 to 32 percentin 1983 and exportsincreased
from $2.3 billionto $5.7 billionin the same period,but unemployment
increasedfrom 19.6 percent to 23.2 percentand real wages fell more
than 10 percentin 1980-83.
Distributional
impactof SAL operations
is complexand a priori
indeterminate.
There mightnot exista largenumberof possibilities
to
improve employment and income distributionin
the process of
stabilizationand structural adjustment. But the issue deserves
explicit treatmentin the SAL analysis. The costs and benefitsof
alternative
adjustmentpaths should be brought out explicitly.
- 29 -
RelationshipBetween Objectivesand Instruments
Policy
task.
any
If
design
in the case
of multiple
objectives
is not an easy
policy objectiveswere positively correlated in response to
given
instrument,
so
that
the
attainment
of
any
objective
necessarily implied progress toward achieving the remainder, little
difficulty
would be encountered in
the formulation of policy.
But
certain objectives are negatively correlated. In addition, the effect
of each instrumenton all objectivesis not positive. This requires the
use
of multiple instruments, some being particularly assigned to
eliminatethe negativeeffects of the others. All the multi-directional
links and effects should be explicitly considered in a
coherent
program. The questions which need to be particularlyaddressed include
the following:
(1) How large will the response of the objective variables be
to a given
values
change
of the
in an individual
short-term
and the
or in a package
long-term
elasticities
of instruments?
of (a)
The
imports
and exports with respect to the exchange rate; (b) inflation with
respect to money stock and exchange rate; and (c) savings and investment
with respect to interest rate, have important implications for policy
recommendations. If the short-termelasticitiesare too low because of
structuralrigiditiesin the economy, moderationis needed in the use of
these instruments and the continuationof some of the interventionist
measures (multiple exchange rates, import restrictions, drawback
schemes, tax and interest preferences for exports and investment,
selective credit policy, etc.) can be justified until the structural
constraints are eased.
(a) -
(c) are discussed extensively in the
literature,but receive less attention in the SAL documents.
-
30
-
(2) What indirecteffectswould the policyinstruments
create
on otherobjectives?Will theybe positiveor negative?A goodexample
to illustratethis point is the cost-pusheffects of public firms'
outputpricesand exchangerate adjustmenton inflationin Turkey. In
the stabilization
programs,inflationhas been seenmainlyas a monetary
phenomenonand the effectsof the cost-pushfactorshave not received
due consideration.The reversalin the rate of inflationin 1983after
substantial
decreasesin 1981and 1982,is explainedmainlyby the costpush effectsof continuousexchangerate adjustment
and particularly
by
the increasesin the publicsector'soutputprices. The outputprices
of the publicenterprises
were liberalized
in 1980,but littlehas been
done to improve their efficiency.
They can now pass their
inefficiencies
on their prices and contributeimportantlyto general
price level through the basic intermediateand capital goods they
produce.
(3)
Could the negative side effects be eliminatedwith
speciallyintroducedpolicy instruments? Would these new instruments
themselvesproducenegativeside effects? How couldthey be takencare
of? Liberalization
of interestratesin Turkeysubstantially
increased
the cost of borrowingfor both working capital and fixed capital
(lendingrates increasedas high as 70 percentyielding25-30 percent
real interestrate) and negativelyaffectedinvestmentin the private
sector.
To
liberalization,
of
the
gradually
banking
counteract this negative effect of interest rate
the government tried
sector
from 25 percent
to reduce the intermediation
cost
by reducing the transactiontax on credit
in 1980 to 3 percent
in 1984.
This policy
resultedin a reductionin governmentrevenueonly. The oligopolietic
- 31
-
conditionsin the bankingsector preventedthe cost reductionto be
passedon to borrowers.
(4) What will be the sequenceof policymeasures? Will they
be introduced simultaneouslyor sequencially? Good examples of
sequencingare the ones discussedin (2) and (3) above.
inappropriate
Delays and inabilityin improvingthe efficiencyin the public sector
and banking sector substantiallyreduced the positive effects of
in thesesectors. Publicsectorpriceswere liberalized
liberalization
the publicsectoruntil
in 1980,but no actionwas takento rationalize
1983. Besides,the measurestaken were not radicalenough to create
in efficiency.In the financialsector,interest
sufficientimprovement
in 1981, but littlehas been done to introduce
rateswere liberalized
in the bankingsector. The CapitalLaw, enactedin 1982,
competition
regulatesthe capitalmarketand is not directlyrelatedto the market
structurein the banking sector. Some competitioncould have been
imposed on the privatesector throughlarge public banks such as the
Bank.
Agricultural
(5) What is the time lag of the responseof the key macro
variablesand targets to policy variables? How would the policy
variablesbe time-phased?These questionshave importantbearingon the
elaboratedin
speed of adjustment.However,they are not sufficiently
the SAL documents.
Analysis
Partialvs. GeneralEquilibrium
SAL operations are formulated around various economic,
and socialobjectiveswhich are linkedto a multitudeof
institutional
interdependence
and inter-temporal
policy instruments.Contemporaneous
- 32 -
is one of the key features of these programs. This necessitates an
efficient integration of partial and general equilibrium analyses.
Partial analyses focus on certain sectoralissues and recommend detailed
sectoral policy measures.
They should, however, be integrated in a
general equilibriumframework to take account of all interactionsand to
ensure contemporaneousand intertemporalconsistency.
The three SALs we have studied, are dominated by partial
analysis,based on various macro, sector or other policy-focusedstudies
undertaken under
divisions.
the
economic and
sector work programs of
the
These studies yielded numerous objectives and policy
recommendations,particularly in the case of Turkey and Philippines.
these
However,
general
objectives
equilibrium
and recommendations
framework
to
analyze
the
were not
integrated
interactions,
in a
trade-offs
and consistency.
Lack of a Clear Medium-Term PersDective
The objectivesand policy instrumentsof SALs need to be placed
in a well-elaborated medium-term perspective in order to guide the
policy actions and institutionalimprovementstoward the desired mediumterm goals. However, most of the SAL programs lack a clear medium-term
outlook.
What is needed is a clear analysis of the growth potential of
the economy and the main structural and institutionalconstraints and
policy-induceddistortions that hinder the full use of this potential.
On the basis of such an analysis, alternati-vegrowth paths can be
projected in terus of a set of chosen macro performance indicatorsand
time-phasedpolicy instruments consistentwith them.
-
All
SALs examined
in this
33 -
study
include
projectionswhich are very useful to see the
range
medium- and long-term
of likely
changes
in
the economy. These projectionsare often obtainedfrom RMSM on the
basis of assumedgrowthrates and elasticities
of some key variables.
The policy analysis behind these assumptionsand projectionsare,
however,not alwaysclear.
- 34 -
4.
UODM
IONS TO INPDVE THE ANALYTICALflhEWM BK OF SALS
Introduction
In the previous section we have identifiedvarious key issues
that need further attention in the policy analysis of a number of
SALs. These observationsapply mainly to the three SALs we have studied
in depth, but are also appropriate to others we have examined less
closely.
These issues indicate that SALs lack an articulated analytical
framework for
policy analysis comparable to the one for project
evaluation. Project lending is the traditionalmeans of lending in the
Bank.
Through the years, the Bank has accumulated experience,
expertise, and procedures in the design, implementationand supervision
of
projects and
lending.
comparative advantage in
SAL is a new instrument.
negotiation,
policies,
established a
implementation
both
at
the
and
It is related to the design,
supervision
macro and the
project
micro
of
level.
overall
adjustment
The Bank staff
has
less experiencein designing comprehensivepolicy packages.
An analytical framework involvesan integratedset of concepts,
issues, procedures, techniquesand guidelines for policy analysis. The
advantage of having such a framework is clear. It provides a unified
set of tools and concepts and a common language to
issues.
analyze
adjustment
It also helps organize our views and facilitates clear and
systematicthinking.
Although the analytical base of the policy measures of SALs is
not yet well developed, there is a strong learning-by-doinginvolved in
- 35 -
the SAL operations.
As experience accumulates the technical and
analytical scaffolding of these operations will naturally improve.
However, we feel this incremental progress can be augmented by more
immediate and concerted action.
On the basis of the evaluation
presented in the previous section, we shall make some recommendationsto
help improve the analyticalframework of the SAL operations.
These recommendationsare naturally not sufficientto define a
full-fledgedframework. Specifyinga full-fledgedanalytical framework
is a challenging task and is beyond the boundaries of this study.
However, these recommendationswould address some of the main components
of such a
contain.
framework and indicate the type of features it would
These components are closely interrelated and somewhat
overlapping. They should not be seen as mutually exclusive building
blocks which are mechanically added together to specify an analytical
framework.
Rather, an analytical framework could be thought as an
integrated whole
consisting
of
interrelated concepts,
issues,
procedures, techniques and guidelines derived from the constituent
parts.
MonitorableMedium-TermAction Program
An analytical framework for SALs should include a clear and
well-definedmedium-term growth perspective in terms of the main macro
economic performance indicators and policy instruments.
The SAL
programsneed to be envisioned in such a perspective to orchestrate the
policy actions so as to lead the economy towards a desired growth path.
Defining a medium-term growth perspective requires a clear
analysis of the growth potential of the economy and of the main
- 36 -
structuraland institutional
rigiditiesand policy-induced
distortions
that
hinder
analysis
the
full
combined
considerations
use
of this potential. On the basis of this
with
and the
consideration
possible
changes
alternative
growthpathscan be defined
economic performance
linked
indicators.
to the main policy
phased values
of
in
past
the
trends,
policy
environment,
in terms of the identified
These indicators
instruments
of these instruments
global
in order
consistent
then
macro
need to be
to estimate
the time-
with the projected
growth
paths.
The
identification
of
a set of monitorableperformance
indicatorsand policy instrumentsis a major task.
already been done in the Bank.
performance
indicators
and policy
term growth and structural
which would fall
outlined
ensures
the
the consistency
thing
should
that
include
affect
the
jurisdiction
obtained
of
of the Bank.
to the growth perspective
macro projections
main
the mediur-
of an economy, the monitoring
under the organizational
is
set
instruments
adjustment
In SALs, the closest
just
This
Some work has
we have
from RMSM.
RMSM
in macroprojections
in the sensethatall macro
economicidentitiesare satisfied.
But there is a second kind of
consistency
to be secured:the consistency
betweenthe proJections
and
the policyinstruments. RMSM is not suitablefor this secondtype of
consistencyand should be supplemented
with a medium-termframework
describedabove.
AdjustmentDynamics
Once identified,the performanceindicatorsnsed to be linked
to the policy instrumnts
in order to estimate
the tim-phased
values of
- 37
-
these instrumentsconsistentwith the projected indicators. As already
noted in this report, the timing of different policy actions and the
response lags of the performance indicators to these actions may be
highly important to the success of SAL programs. Different instruments
take differentamounts of time to work, and adjustmentpaths in response
to them may determinewhether or not certain policies conflict.
SAL policies in part work through changing prices.
The
responsivenessin terms of the magnitude and speed of adjustment of
objectives to price changes is conditionedby structural,institutional
and social rigiditiesin the economy. Relaxationof these rigidities is
an important
knowledge
part
of
the
adjustment
process.
However, our current
of adjustmentpaths is not sufficient,both in general and for
a particularSAL country.
If
SAL
programs are
understandingof the adjustment
to
path
be
correctly time-phased, our
of an economy's
policies must be considerably improvedo
response
to
SAL
This will require further
research, in a general level and on country specific basis, into the
dynamics
the
of adjustment.
The experience
and informationaccumulated in
Bank on adjustment Issues would be a significant data source for
such research.
While one might desire to predict the dynamics of adjustment in
all areas of the economy receiving a SAL, certain issues stand out as
being especially important. The following is a tentative list of these
areas
where
research:
decrease
adjustment
the likely
in overall
dynamics
magnitude
credit
might
be especially
worthy
and the lag of response
to economy and its
allocation;
of further
of (1) output
(2)
exports,
to
- 38 -
imports and payments balance to a devaluationand export incentives;(3)
wages, prices and output to a devaluation; (4) output mix to import
liberalization; 1/ (5) savings, investment and output to financial
liberalization;(6) total factor productivity to trade liberalization
and the opening-up of the economy; (7) efficiency of investment to
financial liberalization;(8) relative prices within and between the key
sectors to price liberalization;and (9) tax revenuesand fiscal deficit
to changes in output and prices.
In SAL policy design, an explicit analysis of the adjustment
dynamics in these areas would constitutean important component of the
suggested analyticalframework.
Explicit Analysis of Conflicts and Trade-offs
The evaluation of the design of SALs in the preceding section
focused closely upon a variety of potentiallyconflictingobjectivesand
policies in the SAL programs studied. Many others were noted in the
survey of adjustment issues as well.
It was indicated that the
treatment of conflicts and trade-offs in SAL analysis and presentation
requires more attention and rigour.
An explicit analysis of the
conflicts and the trade-offs might be another significantcomponent of
an analyticalframework for SAL operations.
While
in
objectives will
a
fully
integrated economy, all
interact with
policies and
each other (either positively or
negatively),it is possible to single out a set of potential conflicts
1/ "The Timing and Sequencing of a Trade LiberalizationPolicy" (Ref.
No. 673-31) and "Liberalizationwith Stabilizationin the Southern
Cone" (Ref. No. 672-85) are two important researchprojects the Bank
has launched in addressingthe trade liberalizationissue.
-39
which
are
most likely
to condition
-
the
outcome
of a SAL program.
The
following is a (less than wholly exhaustive) checklist of potential
conflicts
that
need
further
consideration
in SAL policy
trade liberalizationvs. reduction in the trade
analysis.
deficit;
(b)
(a)
tariff
reduction vs. increase in public tax revenue; (c) devaluation vs.
reductionin inflation; (d) devaluationvs. output expansion; (e) credit
contraction vs.
capacity utilization; (f) credit contraction vs.
investment and
growth; (g)
financial liberalization vs.
output
expansion; (h) financial liberalizationvs. investment and growth; (i)
export/investmentsubsidies vs. reduction in public deficit; and (j)
eliminationof subsidies vs. income distribution.
The conflicts listed above are sometimes transitory. But the
length of the conflictperiod and the economic and social costs attached
to them are of utmost economic and political importance. This is why
additional attention is needed in SAL policy analysis to address them
explicitly.
Guidelinesfor Monitoring and EvaluatingSAL Programs
While this paper has for the most part focused upon the prior
design of SAL programs, it is apparent that a frameworkfor SAL analysis
should also contribute to program monitoring and evaluation.
evaluationof past SAL performancerepresents the basis
design.
The
for improved SAL
Moreover, the progress of performance indicators must be
monitored over time to determine whether further policy changes are
required.
Currently, the most
common form
of
SAL monitoring and
evaluationdoes not actually gauge the economic impact of a SAL program,
- 40 -
but rather focuses upon the degree to which SAL policies are implemented
and conditionsare met.
This is only the first step in the evaluation
of SAL programs, and reveals little about the effectiveness of the
policies themselves in achieving SAL goals.
A framework for SAL
analysis can contribute to the evaluation and monitoring process by
specifyingthe standard of comparisonagainst which policy outcomesmay
be gauged. The literature currently recognizesthree broad comparison
standards:
(1) the state of the performance indicators prior to
implementation
indicators
of
the
SAL; (2) the target
values
of
the
performance
specified in the SAL; and (3) the values of the performance
indicatorsthat would have prevailed in the absence of a SAL. It should
be noted that the third comparator,which tends to be the preferred one,
represents a
counterfactual scenario requiring a
well-developed
analyticalframework.
Research Requirementsof an AnalyticalFramework for SAL Design
Some of the recommendationsmade thus far have pointed to the
need for more information about the economic structure of the SAL
receiving countries, as well as to the need for closer integrationand
synthesis of existing information. An analytical framework for SAL
design, in fact, provides a set of guidelines to direct research to a
specific set of issues. In general, we feel these issues will be best
addressed by a combination of two essentially complementary research
approaches. In the context of SAL design, the first of these approaches
is composed by specific, issue-orientedanalyses of direct, partialequilibrium relationships linking policy instruments to performance
indicators.
The
second approach is the use of a policy-oriented
41 -
-
economy-wide modelling framework to
study
the
interactions of
instrumentsand indicatorsin a general equilibriumcontext.
The extent to which either approach is fully implemented,of
course, will depend upon the data endowmentsof the countries receiving
SALs,
design
simple,
as well
for
a
as
the
country
nature
poor
non-quantitative
linked by a merely
of
in
analyses
implicit
different
data
may have
countries'
to
of the economy's
macro framework.
rely
problems.
upon
individual
A data
rich
SAL
relatively
problems,
country
may
support considerablymore sophisticatedpolicy studies, as well as a
detailed, economy-widepolicy model integrating the results of partial
equilibriumanalyses into a consistentmacroeconomicframework. Viewed
from another perspective,an economy with largely sectoralproblems, but
reasonable fiscal and trade performance,may benefit most from partial
equilibriumpolicy studies. An economy suffering from fiscal deficits,
external payments imbalances, severe inflation, and distortion in the
financial sector, on the other hand, must be studied within an
explicitlymacroeconomicframework;this framework need not be an actual
policy simulation model, though as pointed out below, such a model
possesses significant advantages.
Issue-oriented studies are also
suitable for applying cross-countrydata to establish stylized facts
about adjustment dynamics and regularitiesregarding the relationship
between indicatorsand policy instruments.
Issue-OrientedResearch
Issue-orientedor partial equilibriumresearch has two distinct
but highly important roles to play in SAL design. The first of these,
as suggested above, is to analyze the structural features and the
- 42 -
relationships
linkingpolicyinstruments
to performance
indicators.The
results of this type of research feed directly into macroeconomic
analyses,as well as beingimportantfor theirown sake. An exampleof
this would be a study of a SAL recipient'sexport sector and the
responseof that sector to differenttypes of incentives. Depending
upon factors such as market share and world demand elasticities,
a
devaluation could raise or lower export revenues,while tariff
unificationcould have similarlyambiguouseffects,dependingon the
sector's import requirements. These issues must be well researched
before the macroeconomiceffects of export sector policies can be
assessed.The same appliesto analysesof agricultural
production,
the
manufacturing
sector,or the financialsector.
The secondrole for partialequilibrium
analysisis to address
one of the broad objectivesof all SAL programs,the raisingof output
and total factor productivity.As pointedout earlierin this paper,
the promotionof efficiencyin all economicsectorsis one of the key
distinctionsbetween structuraladjustmentand stabilization. The
in individualsectorsto changesin
responseof outputand productivity
and
relativepricesimprovedmarketingpractices,revisedregulations,
other featuresof a policy packagecannot be evaluatedthroughpurely
macroeconomicanalyses, but must be addressed through in-depth
microeconomic,
industry-specific
research.A partiallistof key topics
for researchalong theselineswould include: (1) the responseof crop
outputsto changesin producerprices,and of agricultural
productivity
to changesin fertilizersubsidies,extensionprograms,etc.; (2) the
responseof labor and capitalproductivityto changes in industrial
incentives,
creditpolicy,and wage/priceregulations;
(3) the response
-43-
of lending/deposit
rates, savings trends, and bank loans to revised
financialsector regulations;(4) the responseof the efficiencyof
investment
to financialliberalization;
and (5) methodsof improvingthe
productivityand financialperformanceof governmentagencies and
parastatals.These researchareashave figuredprominently
in most SAL
designeffortsto date,and will continueto do so in the future.
PolicyModelling
Estimatingthe trade-off
s and interactions,simulatingthe
effectsof proposedpolicies,and projectingthe futureperformanceof
the economyunder variouspolicy scenariosare importantcomponentsin
an analyticalframework. Policy-focused,
economy-wide
models are very
usefultoolsto performthesetasks. In doing so, policymodellingmay
serve as a basis for unifyingand integrating
some of the componentsin
an analyticalframework. However, this does not imply that an
analyticalframework cannot be defined without a policy modelling
in theirown rightand
component.All othercomponentsare significant
sufficientto specify the required framwork without a modelling
dimension.What policymodellingcan do is supporta formalintegration
contextand adds new
of some of the componentswithin an economy-wide
features such as consistency,quantificationand cohesion to the
suggestedanalyticalframework.
Severalmodelshave been developedin the Bank and successfully
includingthe 1MSM used in the
used in some SAL and non-SALoperations,
threecountriesunderstudy and a CGE used in the caseof Turkey. R1SM
is
a
projection
performance
model,
indicators
to
which
does
not provide
any key policy
for
instrumnts.
response
It
is
of
not
- 44 -
suitablefor policyanalysis.The policy-oriented
models,on the other
hand, are (a) highly personalized,poorly documentedand hardly
accessibleto wider audience;(b) limitedin the numberof objectives,
policy instruments
and closurerules; (c) designedmainlyfor research
purposes;(d) suitablefor addressingonly a limitednumberof issues;
and (e) not formulatedas user-orientedpackages. The CGE models
representan importantsub-classof policymodels, and they have two
additional
weaknesses.First,they are real-side,
long-runmodelswhich
are not suitable for the analysis of the shorter term financial
movementsof interestto SAL designers. Second,they tend to be very
large, complex, sectorally disaggregatedwith longer preparation
requirements than
may
be
permissible in
SAL
policy design.
Consequently,
the use of policymodelsfor operational
purposeshas been
limited. The suggestedframeworkshoulddraw on thesestudiesbut try
to avoidtheirlimitations.
If appropriatelyconstructedand responsiblyused, the main
contribution
of the modellingcapabilityto the policyanalysisof the
SAL and non-SALoperations
would includethe following.
(1) It
would
help working out
contemporaneouslyand
intertemporally
consistentmacro policy packages. SALs are multipleobjectiveand multiple-instrument
operations.Some of theseobjectives
are complementary,
but others are partiallyconflicting.The multidirectionallinks among objectivesand instrumentsare not always
satisfactorily
formed in the policy
framework would help
to check the
analysis
of SALs.
consistency
The suggested
and feasibility
of the
objectives,
estimatethe trade-offsbetweenconflicting
objectives,
and
simulate the static and dynamic effects
of
policy
lnstruments
on
- 45
-
It would introduce formally the principles such as
objectives.
"coherence","compatibility",
"consistency",and "time-phasing"into the
policy analysis and facilitate tracing of the general equilibrium
consequences of alternative policies, avoiding potentially misleading
partial equilibriumconclusions. It would also aid in the evaluation of
SAL programs by helping assess what would have occurred in an economy in
the absence of the SAL and by facilitating the identification of
specific causes of program shortfalls.
(2) It would bring discipline to policy analysis. SALs tend
to be too comprehensiveand too general. This is done at the expense of
in-depth analysis of major issues. The proliferationof objectivesand
instruments spreads the limited implementation capacity of the member
countries too thinly.
By restricting the analysis to the key macro
objectivesand instruments,a formal policy simulationsframework would
facilitate in-depth analysis of the major problem areas in the
economy.
It would force the analysts to shift the attention from
"enumerating objectives and instruments" to "analyzing major issues",
and from loose policy statements and intuition to refined policy
advice. Policy objectives on major issues would then serve as the core
for further extension of the policy set to the sector/micro level,
subject to administrativeand resource constraints in implementation.
The model would also help identifywhich policieswould have significant
impact on the objectivesand which would not in a particularcountry, so
the most attention should be focused on the former.
(3) It would serve as a vehicle for dialogue on the diagnosis
of problems,
slnce
on the
differences
types
of opinion
of instruments
may exist
and the
within
speed of adjustment,
the Bank, between
the Bank
-
46 -
and the Fund and between the Bank and the member countries. The
suggestedframeworkcan provide a common base for policy discussion
withinwhichthe differences
of opinioncan be reducedto testableforms
such as equationspecifications,
coefficient
valuesand closurerules.
(4) It would help to institutionalize,
discipline and
coordinatethe policy making process in the member countries. The
policy making process is fragmentedin some of the member countries.
Various
policy
ministries
with
framework
little
was
are
responsible
coordination
transferred
for
different
amDng them.
to
the
member
If
parts
the
of
policy
country with
economic
modelling
technical
assistanceand training,policy making processwould be substantially
improvedin some countries.
(5) It wouldhelp to bring to surfacethe implicit.
assumption
made in policy analysis. All policy recommendations
involve some
implicitmodelling.With the suggestedframework,
decisionswith regard
to structures,
parametersand closurerulescan be made explicit. This
wouldbringclarityand transparency
in the policyanalysis.
(6) It would enable one to gain insightinto the behaviorof
the economy. There are importantlearningeffectsinvolvedin model
development
and implementation.The processof modellingoften sheds
considerable
lighton the workingsof the economy. A policy-modelling
frameworkcould also be seen as a bridge betweenresearchand actual
policymaking.
Main Featuresof the SuggestedModellingFramework
Most of the models developedin the Bank are researchoriented. They have been developedfor specific tasks and their
-
47 -
computersoftwareis not yet well documented.The frameworksuggested
in this paper shouldbe an operational
tool, supportedby researchand
located in a user-orientedenvironmentin a standardizedformat
accessibleto a wider range of users. The softwareshould include
appropriateoutputtingsubroutines
to facilitatequick and easy use of
resultsfor reporting.
A singleall-purpose
policymodelwould not be meaningful. A
generalflexiblepolicy-modelling
systemwith many choiceswith regard
to the number of sectors, objectives,policy instruments,equation
specification,
adjustment
mechanismand closurerulesfromwhichvarious
model structurescould be derived depending on data availability,
institutional
constraints,
time frame and policyfocus,would serve the
purposebetter. The choicescould be increasedand improved. Such a
flexiblesystemwould providethe possibility
of constructing
a menu of
modelsrangingfromvery simple(one sectorwith no behavioral
equation)
to more sophisticated
structures.
The main purposeof the suggestedframeworkis policyanalysis
ratherthan projections.In that respect,it would be complementary
to
RMSM. RMSM is not suitablefor policyanalysis,concentrating
instead
on formulatingconsistentprojectionsof the main macroeconomicand
balanceof paymentsaccountswithoutexplicitlinkageswith instruments
to achievethem.
The issues to be addressedin the policy modellingshould
includethe following.1/
1/ Some of these issues are explicitlyaddressedin a number of CGE
models developedin the Bank for Turkey,Thailand,Yugoslavia,and
IvoryCoast.
48
-
(a)
policy
The suggested
variables
rebates,
supply,
framework should incorporate
which includes
interest
credit
-
exchange rates,
and tax preferences
allocation,
key commodities in agriculture
QRs, tariffs,
on exports
efficiency
indicators,
The effects
listof
export tax
and investment,
relative
and industry,
and government expenditure.
a large
transfers,
money
prices
price
of institutional
of the
controls
changes could
also be accounted for through exogenous changes in parameters.
(b)
It
should incorporate
mechanisms and a large
(c)
both price
menu of closure
Apart from relative
and expectations.
simulate
the effects
prices,
the general
of adjusting
wages, energy prices
(d) Financial
explicitly
various
cost of credit,
general
price
or decontrolling
and agricultural
sector
to the real
developing
this
accounts
sectors
financial
These issues
the public
instruments
framework would
process
enable
explicit
interest
be
aggregate
in
demand and
of an endogenous
which a modelling
less
attention
Monetary
in modelling
can be embedded in a flow-of-funds
sector)
and also
in the
should
from the CGE approach.
framework with which financial
(including
firms,
to
side of the economy through
is a key respect
have always received
economies.
needs
support prices.
Along with the determination
level,
issues
of public
investment,
framework for SAL design would depart
and financial
major prices
and money supply
mechanisms (via
etc.)
level
to excess demand, cost push
output prices
modelled and linked
transmission
price
The suggested framework should be suitable
economy such as exchange rate,
rates,
adjustment
rules.
also to be made endogenous and to be linked
factors
and quantity
linked
deficits
(surpluses)
would be interlinked
of various
with various
to new money creation.
modelling
of
the
Such a
money supply
and
-
49 -
monetary processes and would be very useful to simulate inflationary
dynamics, output
effects,
crowding-out effect, and
medium-term
implicationsof monetary programs.
(e) Trade and payments seem to be the backbone of adjustment
programs. The suggestedframework should have a detailedtrade and debt
block with appropriate demand and supply equations for imports and
exports capable of analyzing the effects of instruments such as QRs,
tariffs, exchange rate,
export
subsidies, interest rates, debt
restructuringoperations, and capital transfers. The trade and debt
block would also enable the linkage of the national economy to global
trade movements through internationalprices, trade volume and capital
flows. It would also facilitatethe analysis of differenttime profiles
of various debt reschedulingalternatives.
(f) There is a constant interest in the Bank and elsewhere in
the distributional effects of structural adjustment programs.
The
suggested framework should have an employment and income distribution
block capable of analyzing the sources of inequality (factor prices,
skills, elasticity of substitution,sectoral allocation of investment,
taxes and subsidies,saving behavior of income groups, excess to credit
and investment opportunities by income groups, etc.) and simulating
redistributivepolicies compatiblewith adjustment.
This list of issues shows the choices that should be included
in the suggested framework. Naturally, data and time might not permit
the use of all these features in a model constructedfor a particular
country. In addition, a model should be small and intelligibleenough
to be explained to the policy maker.
-
50
-
AUDIX
The first part of this appendix presents the summary notes on
the structural adjustment issues in Turkey, Malawi, and Philippines the countrieswe have reviewed intensively in this study --
to provide
some of the country specific background underlying our examples,
illustrationsand analyses.
The second part contains a longer, more detailedversion of the
survey of adjustmentissues.
-
51 -
A. COUNrY EKIPMINCES OF W!KECtUEALADJUSTIiIT
TURKY
Introduction
The growth of the Turkish economy has been impressive in the
past, averaging 7 percent in the First Perspective Plan period (196377). The high growth was accompaniedby substantialstructural change;
the share of manufacturingin GNP increased from 11.9 percent to 17.5
percent, while the share of agriculturedecreased from 34.2 percent to
20.7 percent, in the same period.
With
arising
in
the
from Turkey's
mainly
1973/74
emergence
and
consequent
of a protracted
delayed
balance
adjustment
in world
contraction
of payments
to oil
demand,
crisis
price
increases
the
favorable
growth process has been interruptedsince 1977.
Since 1980 a series of adjustmentprograms has been introduced
to stabilize the economy and to adjust it to the new external
conditions.
These programs have been supported by (a) the Fund with
three standby arrangements; (b) the Bank with five SALs; and (c) the
OECD with debt rescheduling and consortium credits.
Since then,
substantialrestructuringhas been achieved in the Turkish economy.
StructuralCharacteristicsof the Turkish
Economy Prior to Adjustment Programs,
Turkish
economic
development
in the
last
two decades
exhibits
a
number of structuralcharacteristicswhich are of considerablerelevance
for future developmentpolicy.
(a) Industrialstrategy: Industrializationin Turkey ha been
consideredas the main instrumentof rapid growth, structuralchange and
-
52
-
self-sufficiency. As such it has alwaysbeen the most favoredsector.
Resourceshave been channelledinto it through heavy public sector
investmentparticularlyin import-substituting
basic industriesand
through generousfinancialincentivescoupled with a high level of
importprotection
for privateinvestment.
Replacingthe importsof non-durable
consumergoods and their
inputsdid not encountermuch difficultyand the first stage of import
substitution
was completedwith successby the early 1960s. However,
the second stage which involves the replacementof imports of
intermediateinputs and producer and consumerdurables by domestic
productionhas createdimbalancesbecausethe resourceavailability
in
the economydid not matchthe resourcerequirement
of thisstage.
The goods producedin the second stage are more capital-,
skill-, and import-intensive.
A successfulsecond stage import
substitution,therefore,requiresincreasedefforts to generatethe
requiredresources. Turkey chose to intensifythe secondstageimport
substitution
afteroil priceincreaseswithoutadjustingher policiesto
new externalconditionsand to the resourcerequirements
of the second
stage.
(b) System of Protectionand Incentives: The high emphasis
and prioritygiven to industrynecessitated
the erectionof a systemof
protectionand incentivesto direct the economicactivitiesin desired
areas.
This system, which wa
initiatedin the early 19609 and
continuallyenhanced, includes QRs, tariffs, export tax rebate,
retentionof export earnings,foreignexchangeallocationand tax and
Interestallowances. In the last two decades,this systemhas created
(i) high nominaland effectiveprotectionrates;(iI) largeanti-export
-
53 -
bias; (iii) large anti-privatesector bias; and (iv) wide variations in
effective rates among manufacturingsub-sectors. A series of tariff and
import liberalizationmeasures introduced in recent years has partly
improved the situation.
(c) Exports
is
comparable
however,
to other
had
average).
been
Imports have been around 20 percent of GNP which
middle
very
The large
income countries.
low
before
difference
1980
which
The level
(4
percent
of exports,
of
GNP,
on
is partly closed by workers'
remittances,highlightsthe vulnerabilityof the balance of payments and
the importance of export development to sustain the needed flow of
Imports.
After 1980, as a response to policy changes,export revenue
has substantiallyincreased and its structure has considerablychanged.
(d) Resource mobilization:
The
rate of investment has
increased considerablyin the last two decades, but the mobilization of
domesticsavings has lagged; the saving rate has been considerablybelow
the average for
deficit
middle
income
countries,,
The growing
gap
led to
financing and domestic inflationarypressure as well as to a
high level of external borrowing.
(e) Public Sector: The share of public sector in investmnt
and productionis very high; public firms undertake more than 50 percent
of total Investment and produce 30 percent of manufacturing output.
Financial
deficits
Bank borrowings
75 percent
of the public
and this
of the
total
sector
have been closed
through
Central
has created inflationarypressure (On average,
Central
Bank credits
were given to the public
sector in the last three decades. This ratio has decreased In recent
years).
- 54
Response
to Oil Price
The impact
-
Increases
of oil
price
increases
on the Turkish
been substantial,because more than 80 percent of the
been
imports
imported.
to export
The
increased
revenue
oil
from about
prices
raised
economy has
required
oil
has
the share of oil
25 percent in the
pre-1973
period
to 100 percent in 1979, which in turn substantiallydecreased the nonoil import capacity of the economy.
The situationwas aggravated by
the subsequentworld depression, increases in the interest rates in the
internationalcapitalmarkets and a decline in workers' remittances.
No significant adjustment measures have been taken since
1973.
In contrast, the growth rate of investment particularly in
import- and capital-intensivesectors has been accelerated.
Capital
and import requirementssharply increased,while voluntary savings and
exports were lagging.
The governmentresortedto deficit financing and
short term external borrowing at unfavorable rates.
The rate of
inflation increasedfrom 15 percent in the early 1970s to 106 percent in
1980.
Short term external debt rose from $216 million in 1974 to $6.6
billion in 1977.
By 1978 borrowing possibilitieswere exhausted.
Imports declined and production and investment came to a standstill by
the end of 1979.
StabilizationAttempts 1978-79
By mid-1977Turkey began taking stabilizationmeasures.
These
measures were supported by the Fund with April 1978 and July 1979
Standby Arrangements.
In addition, $5.5 billion external short-term
debt (includingcommercialarrears) was rescheduledmainly through the
OECD, and $1.45 billion OECD sponsoredcredit. were arranged.
-
55 -
The outcome was mixed, when compared with the goals of the
stabilization program.
Although they helped to prevent further
deterioration in the economic conditions, these measures were not
sufficient to bring the economy back to stable growth.
In the early
1980s, it was evident that traditional corrective measures were not
sufficientto put the economy back on its feet; substantial structural
adjustmentwas needed.
1980 Policy Measures: Prelude to Stabilizationcum-StructuralAdjustment
Bold and far reachingmeasures taken in January 1980 represent
a
major turnabout in Turkish economic policies.
These measures
include: (a) a large devaluation followed by daily adjustment of the
exchange rate; (b) higher export incentives in the form of subsidized
credit, priority and duty-free access to imported inputs; (c) partial
import liberalization;(d) tight monetary policy to restrain domestic
demand; (e) decontrollinginterest rates and State economic enterprises'
(SEEs) prices, and (f) simplificationof regulationsand procedures.
These policies were aimed at promoting greater reliance on
market forces and less on direct state intervention and control,
increasedexport orientationand a self-reliantSEE sector.
Support of the InternationalFinancial Community
The Fund supported the Program with a three year Standby
Arrangement (SDR 1,250 million) effective June 1980. On its successful
implementationtwo new one-year standby arrangementswere approved in
June 1983 and April 1984.
- 56 -
Debt reschedulingand OECD sponsored credits continued in 1980
and 1981, which substantiallyimproved the maturityprofile of external
debt and contributedto more prudent debt management.
The Bank also supported the program with the following five
SALs.
Table
Loan
SAL I
Supplement
1:
TURKEY: Structural
Adjustment
Date of
Approval
Amount
($m.)
3/25/80
200.00
Loans
Disbursements
December 31,
to
1984
200.00
11/18/80
75.00
75.00
SAL II
5/12/81
300.00
300.00
SAL III
5/27/82
304.50.
304.50
SAL IV
5/23/83
300.80
300.80
SAL V
6/14/84
376.00
250.00
Objectives and Policies of SALs
Economic
analysis and policy recommendationsof the SALs were
based on the economic and sector work of the Division and particularly
on Public investment Review (3961-TU), Industrializationand Trade
Strategy (3641-TU), Energy Assessment Report (3877-TU), Agricultural
Sector Survey (4204-TU), Financial Sector Review (4459-TU), and a
Country Economic Memorandum (4287-'TU). A "Protection and Incentives
Study" was also completed to quantify the impact of the system of
incentiveson manufacturingsub-sectors.
-
57 -
Major objectives and policy recommendationsof the five SALs
are summarizedin Table 2.
Policy Implementationand Economic Performance
This section describes the implementationof the policies and
of the Turkish
the performance
of
Most
the
Further
implemented.
imports,
liberalizing
economy under five
policies
improvements
are
still
in
needed
have
been
particularly
in
SALs
reforming the SEEs, and introducing medium-term
policy planning capabilities.
structuraladjustment
Fiscal
recommended
SALs.
programs
The
major policy changes under
are as follows:
and Monetary Policy: To increase the tax revenue and to
reduce the tax burden on wage and salary earners, the tax system was
reformed in 1981.
has been constrainedin line with
Public investment
available resources.
The number of public investmentprojects has been
reduced considerablyand priority has been given to a small number of
important projects to speed up their implementation. As a result of
these fiscal measures, the Central Government deficit/GDP ratio has
decreasedfrom 5.3 percent in 1980 to 3.3 percent in 1983 (Table 3).
This resulted in a fall in the growth of money supply from 58.4 percent
in 1980 to 35.0 percent in 1983 as the public sector is the main
borrowerfrom the Central Bank.
An undesirable development in the fiscal field is the fall in
the tax/GDP ratio from 20 percent in 1980 to 17 percent in 1983. This
is due primarily to the generous tax allowances granted to industrial
exporters and
to
the reduction in the
transaction tax
preferentialcredit from 25 percent to 15 percent in 1981.
on non-
Table
Area
Trade
and payments
Final
2:
TURKEY: SUIMARY OF OJECT IVES MAD POLICY ECOMMENDIIONSOF FIVE SALS
Objective
Reduce balance
deficit
of payments
Intermediate
Policy Instruments
Objective
Increase
exports
by elidmnating
disprotection
of export sales
and anti-export
bias
Gradually
Decrease Imports by efficient
import substitutlon
In energy
Provide additlonal
Lncentive
to infant
industries
In the form of production
and
investment
subsidies
on a temporary
basis
and a degressive
scale
eliminate
QMs and exchange
controls
Use tariffs
and exchange rate for protection
Reduce tariffs
to 30 percent
in 5 yeas.
Pursue a realistic
exchange rate pollcy.
Adjust
exchange rate according
to the price
differentials
between Turkey and the trading
partners
Use export subsidies
Eliinate
then over
rate
Grant
export
Enaure
export
on transitory
basis
time.
Rely more on excbange
subsidies
duty-free
production
On value-added
access
to all
basis
inputs
used
in
Encourage export-oriented
investment
by tax and
interest
allowances
and by foreign exchange
allocation
Simplify
administration
and procedures
Take admialstrataive
ue"aures
to improve
marketing,
quality
control,
standardization,
etc.
Introduce
export insurance
Encourage
investment
in indigenous
sources
Prudent
debt
management
Improve
structure
aturity
and source
of debt
Allow no comerical
Try
Limit
arrears
to reschedule
commrcial
Computerixe
debt
credit
statistics
energy
Table
Area
Price
Final
stability
2:
TURKEY: SUMARYOF OBJECTIVES ANDPOLICY REWOIAENDXCIONS
OF FIVE SALS (cont'd)
Objective
Reduce the rate
of inflation
Intermediate
Objective
Reduce domestic dewand by curbing
monetary expansion through
limiting
Central Bank's credit to
public sector
PolIcy
Reduce public
Instruments
investment
Reduce the number of public projects
Finance only the important
projects
Limit
budgetary
transfers
to SEEs
EUiminate supplementary
Introduce
tax reform.
admAinstration
Liberalize
Ensure efficient
Limit
Privatization
Increase the private sector
orientation
of the economy
Increase the share of private
Iavestment to its trend value
of 50 percent of total investment
Ensure efficiency
selling
SEEs
in tax
prices
operation
of SEEs (see
employment in the public
To avoid crowding
to public sector
appropriations
budgetary
out limit
below)
sector
Central
Bank credit
Reduce cost of credit by reducing intermediation
cost through eliminating
transaction
tx,
increaaing
interest
rates on Danzilg sector 's
deposits
vith the Central Bank and decreasing
reserve requiresent
Sinplify
investuent
automaticity
and envure
incentives
Encourage the availability
of medium-tern credit
by indexed medium-term bonds
Create a special
risks of foreign
Reouree
mobilization
Increaae
private
and public
Ensure
real
fund to cover
credit
positive
the excbahna
interest
rates
saving
Limit taxation
gains to real
inflation
of interest earnings and capital
returns
by making adjustment for
Adjust profits
of assets
for
eform capital
savings
markets to attract
Increase efficiency
sector
inflation
through
and revenue
revaluation
financial
in the public
Table
Area
2:
Final
Effleiency
TURKEY. SUMMARY
OF OBJECTIVES AND POLICY EECOMHENDATIONS
OF FIVE SALS (cont'd)
ObjectLve
Intermediate
Increase
efficiency
in
production
and investment
both in public and private
fectors
Reduce
Equalize
protection
protection
Objective
on domestic
between
Policy
*sles
sectors
Ensure operation
of SEEs according
to market principles
Liberalize
Limit
trade,
the
Simplify
financial
markets
scope and extent
administration
Eliminate
Increase
efficiency
manaement
Instrument
and prices
of selective
credit
nd procedures
QMs
in economic
Reduce
tariffs
Eliminate
subsidized
credit
Introduce
proper project
in the public sector
to SEEs
evaluation
Give autonomy to SEEs for their
economic and financial
decisions
principles
staffing,
Reduce direct
controls, use policy
rely on market forces
Limidt micro
planning,
rely
instruments,
on macro
8
pollcy
planning
Kudiuu-ters
f ramwork
Increase
ediumr-term planning
and policy mking capabillty
Prepare
master
iron and steel,
plans for key sectors
(energy,
transportation,
agriculture)
Prepare the fifth
five-year
plan (1985-89)
the basis of recomended
policies
Income Distribution
Reduce inequality
Energy
Rationalize
consumption
production
of energy
Reduce
and
Raise
costs
the
tax
energy
Substitute
petroleum
Encourage
burden
prices
to reflect
indigenou
greater
on wage and salary
energy
conservation
on
earners
international
sources
for
of energy
Increase
the role of private
sector
in energy
production.
Encourage foreign
investment
Improve the coordination
between
producing
firm.
Increase
their
Introduce
Annually
energy
efficiency
medium-ters
planning In energy
update energy demand and supply
sector.
Table 2:
Area
Agriculture
Final
Increase
exports
TURXRY: SUIHARYOF OIJECYIVES AND POLICY REOUUDAVIOMS OF FIVE SALS (coot'd)
Intermediate
Objective
production
and
Reduce subsldles and controls
Rely on market forces
Improve agrlcultural
Pollcy
Objective
technology
Instruments
Let the prlcec adjust to the trend value of
to
limited
world prLces wLth lnterventlon
guaraeteed
floor prlces Ln year of Low
settLig
prlce
ed levyLig an export tax ln years of
hlgh prices
Gradually
Increase
ellminate
water
subsLdLes
fertiliser
cbargec
on exports
Remove restrictlons
sale cooperatLve.
Make agricultural
self-sufficient
wLth credit
obtained
commercial terms
Establish
crop
insurance
finaacially
on
schbm
Improve m_dlum-term planning
and research
capabilities
~
~
c publlltle
~
~
~
0-
-
62 -
Table 3: TURKEY: SOME ECONOMIC INDICATORS
1979
1980
1981
1982
1983
-0.4 -1.1
-5.6 -5.7
2.8
1.7
-5.9 -12.3
-4.8 -2.4
-7.0 -25.0
4.1
8.1
0.1
-0.6
5.7
-9.7
4.6
6.0
6.5
2.5
2.2
3.0
3.2
7.9
0.8
4.1
3.2
5.7
Growth Rates (percent)
GDP
Manufacturingvalue added
Agriculturalvalue added
Total fixed investment
Public fixed investment
Private fixed investment
Total imports (millionUS$)
Total exports (millionUS$)
Agriculturalexports (mil. US$)
Manufacturingexports (mil. US$)
Mining exports (mil. US$)
5,069
2,261
1,344
785
132
7,909
2,910
1,672
1,047
191
8,933
4,703
2,219
2,290
193
8,843
5,746
2,141
3,429
175
9,235
5,728
1,880
3,658
188
Current account deficit/GDP (percent)
Central governmentdeficit/GDP (percent)
Private investment/totalinvestment
(percent)
4.6
2.2
5.7
5.3
3.5
2.7
1.9
2.1
3.5
3.3
48.8
43.8
40.2
40.4
40.9
Inflation ( percent) 1/
Real wage index (1977 - 100)
Unemployment ( percent)
73.1 101.4
76.0 56.7
17.9 19.6
41.9
52.5
21.0
27.3
50.4
21.7
32.0
n.a.
22.2
Real exchange rate (TL/$, 1977-100)
84.7 113.8 132.1 156.8 164.6
1/
Implicit deflatorof GNP
-
63
-
Trade Policy: A flexible exchange rate policy has been pursued
since 1980. Daily adjustmentof the exchange rate started in 1981. As
a result, the real exchange rate vis-a-vis U.S. dollar was appreciated
since 1980 (Table 3). Some import liberalizationwas introducedin 1980
and 1981: Quota List was abolished, exporters were partially exempted
from duties and controls on inputs. In 1984, the Government announced
major import liberalization. About 70 percent of imports were freed
from QRs. Prohibitionand licencing apply to only a selected number of
imports. In addition, the tariff rates for 494 products were changed:
more than 80 percent of them were reduced substantially.
High
additional levies were imposed on major consumer durables. The foreign
exchange regime was also liberalized considerably: commercial banks
were allowed to set their own exchange rate within the 6 percent point
spread around the official exchange rate set daily by the Central
Bank. Export subsidies in the form of tax and interestpreferenceshave
increased. The Government intends to reduce the average tariff rate
from 32 percent to 7 percent by 1989 and to eliminate export subsidies
gradually to rely more on the exchange rate policy
promotion.
manner.
in export
However, the new tariff rates were set in an ad hoc
It ls not known in what direction the effective rates were
changed.
Financial sector policies: The commercial bank interest rates
were deregulated in 1981.
Lending rates increased as high as 70
percent. To reduce the intermediationcost of the financialsystem the
transaction tax on non-preferentialcredit was reduced from 25 percent
to 15 percent in 1981 and 3 percent in 1984, but the oligopolistic
- 64 -
conditions in
the
financial sector prevented the
gains in the
intermediation costs to be passed on to the borrowers.
Very high
borrowing rates (25-30 percent in real terms) are still the main concern
for firms.
Legislation was introduced in 1982 to establish a legal
framework for issue and trading of shares and bonds, and to regulate
financial intermediariesdealing in stocks and bonds.
Although the Interest rates were deregulatedin 1981, credit to
public firms from the publicly-ownedfinancial Institutionsat heavily
subsidizedrates continued. While the nominal borrowing rate jumped to
70 percent after the deregulationof the interest rates, credits to the
public firms ranged between 5.0 to 21.5 percent.
The government has been largely passive in regulating the
interest rates. Instead of leaving the interest rates to be determined
by the oligopolisticprivate banks, the governmentcould have introduced
some competition in the private banking sector by regulating the
Interest rates through the large public banks.
Improveuent
decontrolled
substantial
in
in the SEEs sector:
1980.
improvements,
one of profits. Som
Their
Output
financial
as a situation
of the SEEs were
performance
registered
of chronic deficits changed to
autonomy haJ been granted
financial and economic management.
prices
to
the
SEEs in
their
Their privileged access to the
Central Bank resources haJ been substantiallyreduced.
The liberalization of SEE prices ws
not accompanied by a
noticeableimprovemontin efficiencyin the operation of SEEs. SEEs can
now reflect their inefficiencies on their prices. This has been an
important
cost-push
element
influencing
inflation
in
Turkey.
- 65 -
Acceleration of inflation in 1983 was
largely accounted for the
continuousincreasesin SEE prices.
Under
Economic performance.
the
structural adjustment
programs, the Turkish economy performed very well in a number of
Merchandise exports have risen from $2,910 million in 1980 to
areas.
$5,728 million in 1983, with export growth led by the manufacturing
The rate of inflation,as measuredby the implicit
exports (Table 3).
price deflatorof GNP, has dropped from an annual rate of 101 percent in
1980 to 31 percent in 1983.
The manufacturing value added and GDP declined in 1980, but
The decline in private investment in 1980
began growing thereafter.
But the growth in
(25 percent) continued in 1981 (9.6 percent).
private investmentrecoveredin 1982 and acceleratedin 1983.
the share of private investmentin total investment ie
However,
still 40.8
percent,substantiallybelow its trend value of 50 percent.
Some problems remain to be tackled, including in particular,
rising unemploymentand worsening of income distribution. The rate of
unemployment increased from 19.6 percent in 1980 to 22.2 percent in
1983.
Real wages declined 10.4 percent from 1980
transitional
deterioration
initial
a
that
understandable
years
costs
in
in
these
of
a
the
years
initial
of
It is
entails
some
program
adjustment
structural
to 1982.
the
but
program,
if
the
social indicators persists, even after the
successful
adjustment
process,
special
attention
should be given to social issues.
1983 marks an interruptionin the adjustmentprocess.
experienced
a reversal
of trends
in the
two major
policy
Turkey
objectives
in
-
66 -
1983: the rate of inflation increased from 27.3 percent in 1982 to 31.0
percent in 1983 and the export revenue declined slightly, from $5,746
million in 1982 to $5,728 million in 1983.
But the new Government
acted imediately to deal with the situation and introducednew measures
in early 1984.
These measures include (a) a substantial import
liberalization; (b) a
centralization
of
restructuring of the tariff system; (c) a
import
administration; (d)
a
substantial
liberalizationof the foreign exchange regime; (e) re-emphasizingthe
role of a flexible exchange rate policy; (f) continuation of export
subsidies in the form of interest and tax allowances; (g) a gradual
reduction in export tax rebate rates; (h) a reduction of the foreign
exchange retention rate from 50 percent of export earnings to 20
percent; (i) a reduction in the transaction tax on non-preferential
credit to the private sector from 15 percent to 3 percent; and (j) a
reaffirmation that SEEs will be free to set their own prices with
certain exceptions,such as suger, coal, and fertilizer.
Economic
performance in 1984 suggests a mixed picture. The
available data indicate that GDP growth and exports show considerable
improvement over the previous year, while inflation and fiscal deficit
are expected to be considerablyhigher as compared to 1983. GDP growth
is estimated to be 5.6 percent, favorably compared with 3.2 percent in
1983.
Exports grew by over 30 percent in nominal dollar terms,
exceeding the 1984 program target of 22 percent. The current account
deficit is expected to be about $1.7 billion. The forecastof inflation
is over 50 percent. The 1984 budget deficit is expected to be about 3.7
percent of GNP as compared to 3.3 percent in 1983.
-
67 -
Background
Malawi has pursued a relatively outward oriented development
strategy. Tariff levels have been fairly low, with much less reliance
on the type of import quantity restrictionsimposed in most developing
countries. Wages have been restrained,with accordingadvantages to the
internationalcompetitivenessof Malawi's exports. The export emphasis
itself has been, with only a few exceptions,in comodities reflecting
Malawi's comparative advantage: agriculturalproducts such as tobacco
and tea.
This emphasis was supported by a high share of public
investmentdevoted to agricultureand transportation.
Until the late 1970's, the results of this policy had been
extremely positive. GDP grew at a rate of 5.8 percent between 1967 and
1977, with agriculture increasingat a 4.1 percent rate and industry at
6.7 percent per annum. The investment rate grew from 13.5 percent in
1967 to 24.7 percent in 1977, while the savings rate increased from 3.8
percent to 20.1 percent in that period. The budgetary deficit as a
percentage of GDP averaged 6.4 percent between 1972 (the earliest
available year) and 1977, a level which did not impose undue strains
upon the financial system.
Over the same period, (constant price)
exports rose at a rate of 4.6 percent per annum. While by the
late
1970s, Malawi still ranked among the poorest countries in the world, it
had advancedconsiderablyfrom its post-independencestate.
Recent Economic Crises
In the late 1970s, a series of external shocks acted to slow
Malawi's growth snd increase its external debt, The severity of the
- 68 -
external
to
events'
impact
was due not only
underlying structural problems in
to the
shocks
the Malawian
themselves,
economy
but
which
prevented rapid, flexible response.
First, Malawi's merchandise terms of trade fell 35 percent
between 1977 and 1980 as an 8 percent decline in its export prices was
compoundedby a 40 percent rise in imported oil prices. The impact of
these price movements was accentuated by the extremely concentrated
nature of Malawi's exports (in 1980, tobacco,tea, and sugar made up 72X
of Malawi's merchandise exports), as well as by the manufacturing
sector's exclusivedependenceupon importedoil.
Second, the fall in the terms of trade not only reduced
Malawi's real income, but also contributedto a serious deteriorationin
the current account balance. Especially onerous was the deterioration
in the non-factor services account:
the rise in sea/air freight
charges,as well as the disruptionof Malawi's cheap, direct rail routes
to Mozambique ports, contributedpredominantlyto the rise in Malawi's
current account deficit.
Third, the rise in the current account deficits led to
drawdowns in official reserves and substantial increases in external
debt outstanding starting in the late 1970s.
The increases in debt
outstanding had more serious implicationsfor the debt service burden
than in the past, due to the high share of the current account deficits
which were financed by commercial,non-consessionaryloans.
Fourth, terms of trade changes and traffic disruptionscombined
with bad weather to promote a slowdown of GDP to -0.6 percent in 1980,
comparedwith an average GDP growth rate of 5.6 percent during 1975-80;
- 69 -
this
was followed
by relatively
of -0.3
percent
in
in 1982 (Table 5).
1981 and 2.6 percent
Fifth,
slow growth rates
the recent
financial
performance
resulted
from
the
period
saw a serious
of Malawi's
effects
public
of
the
enterprises.
terms
in increasing
deterioration
costs
of
in the
This
trade
largely
changes
and
profits;
and depressing
transportation
disruptions
because prices
charged to local consumers and paid to domestic producers
were kept
flexibly
fairly
rigid,
to their
public
enterprises
changed environment.
were unable
These issues
to
respond
were compounded by
more general management problems.
The factors
fiscal
deficits
listed
above contributed
to increasing
towards the end of the 1970s.
to GDP rose to 11.1 percent
lower in the
preceding
The ratio
in the 1980/81 after
decade;
it then
government
of the deficit
averaging considerably
dropped
to
8.1 percent
by
1982/83.
Adjustment Efforts
and SALs
The Government introduced
consultation
with
adjustment
other
in
a series of adjustment
in
The Bank has supported
the
program
with two SALs, one in June 1981 for $45 million,
the
January
1984 for
consideration.
the Bank and the Fund.
program
$55 million.
A third
SAL is under
The Fund also supported the program with two standby and
an EPF arrangements.
The first
exports
program supported
by developing
new smallholder
production
in livestockand forestry
improving
the
financial
by SAL I aimedat (a) diversifying
performance
and estate
crops,
accelerating
and expanding agro-industries;
of
the
Government
and
(b)
public
-
70 -
enterprises
to reducedependence
on externalresources,and (c) increase
foreignexchangereserves. It incorporated
policychangesand measures
in four majorareas;balanceof payments,price incentivesand incomes,
resource management,and institutional
improvements(objectivesand
policyactionsof both programsare summarized
in Table 4).
Under SAL I, the Governmentadjusted agriculturalprices,
increased some public utility tariffs, establishedan Investment
CoordinatingCommittee to screen major investment projects, and
allocatedadditionalfunds throughthe budget to agricultural
sector.
An energyassessmentstudy was carriedout. Stepswere also taken to
strengthen the management in some Press Holding's subsidiaries.
However,the implementation
of the programwas slow on the whole.
Implementation
of the programwas less than satisfactory
in a
number of areas particularlyin
reforming agriculturalprices,
restructuring Press, controlling financial deficits of
public
enterprises
and adjustingchargesand tariffson publicutilities. In
consequence,
the Governmentwas unableto make its last two drawingsin
its two-yearstandbyarrangement,The Bank also delayedreleasingthe
secondtrancheof the SAL. Aftera seriesof discussions
with the Bank,
the Government took several steps to revitalize the adjustment
program. Based on these developments,
the secondtranceof SAL I was
releasedin April 1982. Also, agreementwas reachedwith the Fund on a
new standbyarrangement.
The Government'sdifficultyin makingprogressin a numberof
politically sensitiveareas, including the restructuring
of Press
and committing
itself to a priceliberalizationprogram,delayed the
- 71 -
preparationof SAL II. SAL II, started in mid 1982, was finally signed
in January 1984.
The second
adjustment
program
of
the
Government
supported
by
SAL II, was a continuation of the first program in some areas, but it
also incorporated other areas that have emerged as crucial to a
successful adjustment, including timely distribution of fertilizer to
smallholder sector, elimination of fertilizer subsidy, improving the
efficiency in the operation of ADMARC (public agricultural marketing
agency), dismantling price controls in the industrial sector, annual
review of parastatal financial accounts, and forward budgeting. With
some delay in some policy actions, the program was satisfactorily
implemented. The Bank is now consideringa third SAL to Malawi.
Policy Implementation
This section highlights some of the policies noted in the
preceding table, describes their implementation and
notes their
results.
Trade and Payments
In coordinationwith
the IMF, the Malawian Kwacha was devalued
in April 1982 and again in September 1983; as a result, the real
effective exchange rate index (as calculatedby the IMF) was restored to
approximatelyits 1980 value by early 1984. While moving ahead with the
reorganizationof ADMARC, the agriculturalmarketing agency, authorities
were
relatively slow
to
revise
the
produce prices
paid
by
smallholders. In response to a large 1981 increase in the price for
maize, maize crops in 1982 and 1983 advancedstrongly at the expense of
Table 4s
Area
Final
Trade and
Payments
Reduce Balance of
Payments deficit
Oblective
H&LbTII: SUNIA
Interm-dlate
OF OSJIOIVUS
AND POLICT RCDR
Oblective
DMIOUS OF TW
Policy
Increase
exports by incre.sing
relative
export
prices to suppliers,
as well * by improved
supporting
service.
by the government
1SAL
Inserumonts
Periodic
IMF.
review
of exchange
rate"
in coordination
with
Improvements in mechanism for detcrmining
aaricultural
producer price,
*and reversal
of historical
discrimination
in favor of price.
for self-sufficiency
crops such *c mai*e and rice.
Improve the financial
AD8K,
the state-run
org aisation.
nd operatlonal
efficieney
agricultural
marketing
of
Increas
public investment and recurrent
budgetary
support
of agricultural
research
and extemeice
servce".
Develop medlum/long term financng
capacity
for estate sector.
Study ways to lncr_e
the productivity
of the tobacco
Industry through improved quality
and production
control.
Diversify
eports
Decrease Imports through
substltutlon
In eser.
Develop
mellbolder
production
in lvestock
expand agro-industries.
fficient
lmport-
Ugh
tariffs
ncourage
source
Efficiency
Improve efficiey
and resource
allocation
in
agriculture
ad
Industry
Liberalize
prlce restrictlons
chawges to allow more flexible
changing resource
availabilities
and rmooth
reponses
wag
to
and etate
crops, accelerate
and forestry
industries,
on imported
Investment
oil.
l/utilixation
(Above) Review agricultural
supply
better
incentives
to agrlculture.
of dometic
pricing
energy
to provide
Table 4:
Area
Final
Objective
MALAII:
Intermediate
UShIY OF O&JC=IVZS AMD POLICY UCRODEDIO
Policy
ObJective
S OF TWD SAIc (cost 'd)
Ins truments
qystes to provide
price control
LAberalaze lndustrial
change neeJs.
to price
for sor. rapid responses
for sowe commodities.
Complet- price liberalLsation
prices.
administered
of directly
reviw
More frequent
monitor
Raise and ore frequently
and restrain
ration scarce credit
Central
COvernnent
public
Increase
resource
and
obillpation
of
efficiency
public res ource
am
Deduce central
goverument
flcal
ieading rates
imports.
to
In specific
revenues through raises
public
Increase
Kore frequent
and import dutiem.
surcharger,
taxes,
taxes and departmental
adjustment of specific
of
to improve collection
Review ueasures
charges.
and to increase the buoyancy of the
and tace,
fee
tax system.
deficit
with
budget,
of the development
General curtailment
not yet completed.
to projects
funding priority
procedures
and rationalize
Institutionalize
and revenue projections.
forward budgeting
for
Take measure to improve public enterprise
which in turn reduces the central
performance,
burden.
government I budgetary
effectivess
Increase
mediu term planning
of public
lnvestment
and
and priority
budget reduction
Along with development
of funding
allocation
increase
to on-going projects,
and social services at the expense of
to agriculture
government buildings.
and especially
transport
Increae
activities
support for previously
to capital
relative
under-funded
spending.
recurrent
Table 4:
Area
Final
Publlc
eniterprise
sector
Bolster
deterioratlng
finance
of public
enterprises
Objective
MALANI: SUMMARY
OF OBJECTIVES AND POLICY R3COENMDUIONS OF TIEUSALS (cont'4)
Intermedlate
objective
Policy
Instruments
Strengthen
sedium term planning and project
identification
capacity.
Mev comlttee
to monitor
major public and private
inves tmnts.
Increase
training
to upgrade personnel's
econouic/financial/statistical
analysia.
Increase
public enterprise
charges nd
associated
decreases
in their
implicit
Periodic
accounts
central
government review
of the public enterprise.
promote
subsidies.
of financial
Implementation
of ongoing studies
for
financial/mmnagerial
improvement of the parastatals.
More timely filling
of high level vacancies.
Major restructuring
publlc enterprise)
proper management.
iaer8
Reduce energy
costs and
encourage domestic
energy production
itigh tariffs
Increase
Increaed
research.
ot Press Holdinga,
Inc. (a quasito prevent insolvency,
ensure
on imported
fuelvood
prices
investment
oil
(above).
to reflect
in fuelwood
Research Lito ethanol and other
source
- develop a coordinated
Transportation
insure
transportation
link to coastal
ports
Minimize effect
of current
disruptions.
Explore a permnent
solution
production
productlon
costs.
and
alternative
energy
energy program.
Creation
of secretariat
to coordinate
import
allocations
during transportstion
disruptions.
Study/explore
alternative
probably through Tanzania.
transportation
routes,
most
- 75 -
more traditional
exportcropssuch as tobaccoand groundnuts.In April
1983, new proceduresfor agricultural
pricingstronglyraised relative
producerpricesfor tobacco,groundnuts,and a varietyof other crops,
suggestinga strong
supply
response
in 1984. Moreover, the response of
maize supply to increasedprices was large enough to create large
exportablesurplusesin 1982 and 1983, Nevertheless,
the 1983 current
account deficit rose relative to both 1982 levels and general
expectations
as a resultof a strong declinein exporttobaccoprices
and largeincreasesin transportation
costs. As both thesefactorswere
largely out of the control of the authorities,it seems clear that
reformshave beenworkingin the rightdirection.
Prices
Rationalization
of agriculturalprices and dismantlingprice
controlprovedto be one of the politically
more sensitiveareas of the
Government'sstructuraladjustmentprograms. After a considerable
delay,the programis finallyin place.
In consultation
with the Bank, new proceduresfor determining
the producerprices were adoptedin 1983. Fertilixerprice has been
adjustedand subsidy has been removed except for smallholdersusing
longer transportation
routes. The Governmenthas also introducedan
estatesub-sectorprogram.
In
September 1983, the
first measure to
industrial/consumer
prices was taken:
liberalize
the time allowed to process
applications
for price changeswas limitedto 60 days. As a resultof
the successof thisprogram,the limitwas scheduledfor reductionto 30
days in April 1984. Most importantly,
the prices of 23 commodities
out
-
76 -
of 56 which had been officiallycontrolledwere decontrolledin
December,1983. The controlleditems were furtherreducedto 18 in
December1984. Generalefficiencyrequiresthe appropriate
pricingof
public servicesas well:
chargeshave been raisedfor housingrent,
water, electricity,
and schooling. Interestrates on time and savings
depositshave also beenraised.
CentralGovernment
Efforts to reduce the governmentfiscal deficithave focused
both on the revenuesand expendituressides. The buoyancy of tax
revenueshas been enhancedby new domesticsalestaxes,increasedexcise
taxes, and increasedmotor vehicle taxes. On the expenditureside,
there has been a generalfreeze in salary scalessince 1982, though
governmentemploymentincreases and normal salary incrementshave
contributed
most heavilyto expenditure
increases.1983/84represented
the firstfull year of operationsof the new expenditure
controlsystem
specified in the SAL program; this was reported to be working
satisfactorily.Comparingthe projected1983/84figureswith 1980/81,
total governmentexpenditures
as a percentageof GDP have droppedfrom
34.2 percentto 25.8 percent;as indicatedin the SAL objections,
this
cut has largelycome out of the development
budgetratherthan recurrent
expenditures. Revenuesas a percentof GDP fell much less over this
period,so the governmentdeficithas fallenfrom 10.7percentof GDP in
1981/82 to 8.1 percent in 1982/83,and is anticipatedto reach 6.6
percentin 1983/84.
Malawi's first medium-termpublic investmentprogram was
producedin time for preliminary
preparation
of the 1984/85 budget.
The
- 77 -
core of the programis a three year projectionof governmentrevenues
and expenditures.
PublicEnterpriseSector
In general,the publicenterprisesectorin not anticipated
to
be an importantsource of savings,for it is saddled by high debt
serviceburdens. However,closingpublicenterpriseoperatingdeficits
frees the central governmentto generate its own savings.
The
performanceof ADMARC, the agricultural
marketingagency,improvedin
1983 largelyas a resultof its exportsidesof saize;under the SAL II
prograa, policies are being implementedto reduce marketingcosts,
improvepricinganalysis,limitnew investments
to sarketing/processing
activities,
and improvemanagementquality. Increasesin changeshave
been implementedto improvethe accounts of the public
housing,
railroad,water, and electricitycorporations.In December1983, the
agreementwas finallysignedto initiatethe such neededrestructuring
of Press Holdings,
Inc.
- 78 -
Table
5:
MALAWI: SOMEECONOMICINDICATORS
1979
1980
1981
1982
1983
Growth Rates
GDP
6.6%
-.1%
-.3%
2.6%
4.4%
Manufacturingvalue added
6.5%
3.7%
1.8%
-6.1%
15.4%
Agriculturalvalue added
4.5%
-5.4%
3.6%
5.9%
3.2%
-6.2%
-6.8%
-33.7%
-11.5%
7.1%
Public fixed investment-./
-12.5%
14.5%
-50.9%
-21.7Z
4.7Z
Private fixed investmentl/
3.2%
-34.4%
-9.7%
13.0%
9.3%
Total fixed investment
Imports ($US million)2/
465.7
509.2
429.6
348.8
366.2
Exports ($US million)2/
256.7
327.5
328.7
279.5
250.3
238.3
242.7
224.7
192.5
-23.4%
-19.0%
-12.0%
-8.3%
-11.4%
GovernmentDef/GDP
-9.6%
-11.1%
-10.7%
-8.1%
-6.6Z
Private/TotalInvestment
43.6%
32.4%
41.9%
51.91
52.9%
Major Agri. Exports
n.a.
($US million)
Current Acct. Def/GDP
Real Exchange Rate Index2/
100.0
101.2
102.4
99.7
103.4
GDP DeflatorGrowth
3.4%
14.9%
15.4%
14.5%
9.3%
Money Supply Growth
0.9%
12.6%
26.0%
14.5%
8.9%
1/ deflated by GDP deflator
2/ of goods and non-factor service
3/ increases indicate appreciation
- 79
-
PHILIPPINS
An Overview
During
the
1970s
growth
in
the
Philippine
economy
accelerated. GNP growth increasedfrom 5 percent in the 1960s to almost
7 percent at the end of the 19709 and the ratio of fixed investment to
GNP increased from 15 percent to nearly 25 percent over the same
period. However, the balance of payments problems became more and more
evident as the heavy relianceon foreign savings, external borrowing and
imported oil grew.
exports which
The government made some attempts to diversify
resulted in
reducing the
current account deficit
temporarily.
As a
result of the 1979 oil price increase and ensuing
internationalrecession,the balance of paymentsproblems worsened, real
GNP growth fell gradually from almost 7 percent in 1977-78 to an
estimated 2.9 percent in 1982, and inflation accelerated.
In response to the increasing balance of payments constraints
and their subsequent adverse effect on the development effort, the
Governmentembarked on a stabilizationprogram beginning in 1980. This
was supported by (a) the Fund with two stand-by arrangement.;and (b)
the Bank with two SALs and a US$150 million industrialfinance loan.
The
overall
SALs has been good.
indirect
has
The
taxes
been
performance
The reform
of
policy
of the
tariff
reforms
recommended
under
system and realignment
of
have been substantiallycompleted;however, less progress
made in
implementation
the
of
area
export
of import
licensing
industrial
promotionpolicies, energy
and
regulation.
- 80
-
diversificationand conservation,and resourcemobilizationmeasures has
been good.
IndustrialStratesy - a HistoricalPerspective
(a)
In the early 1950. the principal objective of the Philippine
industrialixationpolicy was Import substitution. Consequently,by the
end
of
the
imports
1960s
of
inefficient
capital
balance
intensive
While
measures
these
performance,
total
the
resulted
manufacturing
-
employment
the
One of
major
manufacturing
sector
creation,
on
over-
the Manila area,
deficits,
and
rapidly
1970s was characterized
Policy
an
measures
Improved
remained
same level
in Manila.
dependent
by a
included
a
and a reform of the tariff system.
in
concentrated
the
The
rate
heavily
employment
external
policy.
exchange
employment
remained
chronic
industrial
of
was
industry in
of payments.
outward-looking
depreciation
sector
led to inadequate
investment,
deteriorating
of
manufacturing
and high protection
concentration
more
the
causes of
as
the
manufactured
constant
in
the
at
1950s
structural
has been the high tariffs
10-12 percent
and
problem
and trade
export
iudustry
of
regime.
the
Tariff
rates ranged from 10-100 percent. The average level of protectionwas
44
percent and quite uneven giving varying incentives.
protection was compounded by import licensing
were directed into those industries with
namely consumer
was a bias
low
growth
goods for
against
in
labor
the
domestic
restrietions.
the
market.
Tariff
Resources
highest
protection
Inherent
in the system
intensity and exports, further contributlng
manufacturing
employment.
Furthermore,
the
financial
-
to
-
81 -
system reinforced the capital-intensive bias investment incentives
through below free market interest rates.
(b)
System of IndustrialIncentives and Promotion
The structure of investment incentives in the Philippines was
such that import-substitutingand capital-intensiveactivities were
encouraged.Incentiveswere aimed at reducingcapital costs and took the
form of accelerated depreciation allowances, net operating loss carryovers, tax deductionsfor expansion reinvestmentand tax exempt status
for
investment
A Board of Investments
equipment.
imported
priorities
and
administer
import
was created
to determine
licenses.
This
system
failed to identify areas of the country's comparative advantage,
reinforced the import-substitution bias of
the protection system,
reinuforced
the bias towards capital-intensityas opposed to high labor
absorption, and its administrationwas complex as well as being biased
towards industriesin the Manila area.
(c)
Energy
Prior
burden
on the
to the
1973 oil
Philippines'
crisis,
balance
oil
imports
of payments.
represented 12 percent of merchandise imports.
only
a small
In 1972 oil
imports
placed
As a result of the
increasein oil prices, the share of oil imports rose to over 25 percent
in 1980. The Philippine government responded effectively to the crisis
during the period from 1973 to 1980 with petroleum pricing and tax
policies which encouraged energy conservation, and development and
conversionto alternativeenergy sources.
However, following the second oil price shock of 1979 the oil
import bill increased from $1.0 billion to almost $2.5 billion and by
-
82 -
1981, oil imports share of merchandise imports was
31
percent.
Furthermore, public sector financed energy development contributed to
increasing budget deficits.
The petroleum price increases imposed
throughoutthe 1970. were effective in generatingrevenue and conserving
energy; however, due to different tax rates on gasoline and diesel,
inefficientsubstitutionsbegan to develop
(d)
Public Sector
Historically, the role of the public sector has been very
passive in Philippine economic development.
In
the late 1960s,
government expenditure averaged 12 percent of GNP and public investment
only 2 percent of GNP. During the 1970s a series of tax reforms brought
about increased revenues and a rapid expansion of public expenditure.
Despite the expansion, public sector resourcemobilizationis relatively
low in the Philippines.
Prior to 1981, public sector resource
mobilization was nearly 16 percent of GNP.
Since then, due to
recessionary conditions, it has fallen to 14 percent.
Tax revenues
represented 11.6 percent of GNP in 1978-80 and fell to 10.3 percent in
1981 under the impact of increased exemptions for personal income tax,
the tariff reform and recessionaryconditions. Government corporations
finance less than 10 percent of their investmentprograms from internal
cash generation and
are
nearly entirely dependent on Government
contributionsand the budget.
(e)
Resource Mobilization
Foreign savings share of GNP increasedfrom 5.0 percent in 1979
to 5.4 percent in 1981 -- quite high relative to the 3 percent share in
-
83
-
1979 of all middle-income oil-importing developing countries.
This
reflects the inability of the economy to increase domestic resource
mobilization. In order to avoid any further increase in external debt,
this dependence needs to be reduced and the domestic savings rate
increased.
(f)
Exports
The major share of the Philippinesexport earningsare derived
from a few primary products - (coconuts,sugar, copper, timber) thereby
keeping the Philippines economy highly vulnerable to commodity price
fluctuations. During the 1970s, the Government succeededin its attempt
to diversifyexports, and non-traditionalmanufacturedexports increased
from US$50 million in 1970 to US$2.30 billion in 1981, or 40 percent of
merchanidiseexports.
However, due to their dependence on imported
inputs, the net positive effect on the balance of paymentswas probably
much lower than that.
Response to Oil Price Increases
The
weak balance of
payments in the 1970s was
further
aggravated by the 1973-1974 oil price increase and subsequent collapse
on commodities prices.
The Philippines felt the impact of these
increases substantiallyas more than 90 percent of the economy's energy
was being suppliedby importedoil.
The Philippine governmentresponded to the oil price increases
by pursuinga number of adjustmentmeasures. During the decade, exports
were diversified, and non-traditionalproducts were developed. Export
growth acceleratedfrom 5 percent in the late 1960s to 7 percent during
- 84
the 1970s.
-
Isport growth was slowed by policy measures aimed at
constraining energy demand, expanding domestic energy production,
expanding rice production in an effort to reduce food grain imports and
restraining
consumption
measures
were
through
supported
by
demand
the
management
IMF with
a
policies.
three
These
year
financing
arrangementfrom 1976-78 and a one-yearstandby in 1979. The government
embarked
needed
and
on a large
to sustain
long-term
energy
crisis
foreign
growth
grew
over
program
and investment.
borrowing
to
borrowing
from
$2 billion
to
finance
the
Gross disbursements
$400 million
per
imports
of medium
year
before
the
per year at the end of the decade.
The high level of borrowing maintainedgrowth and investment
rates
and
the currentaccount deficit was reduced from 6 percent of GNP in 1975-76
to 4.5 percent of GNP in 1977-78.
Unfortunatelythis improvement in the balance
reversed
bill,
by the
widened
accelerated
1979 oil
price
current
account
the
inflation
incomes,
the
further
aggravate
improvements
to
government
in
increases
deficits,
increased
by 1979.
increased
minimum wages
In order
in
pressure.
1970s,
the
1979
the
was
import
slowed real GNP growth and
19 percent
inflationary
the
which
of payments
to maintain
mid-1979
Despite
oil
price
only
the
increase
real
to
policy
further
exacerbated the long term balance of payments problems which faced the
Philippines in 1980 and the underlying structural problems:
thirds
of
foreign
commodity exports;
balance
of
supplled
by imported
exchange
(2)
payments;
earnings
were
derived
from
(1) two
traditional
the
industrial
sector
(3)
more
80 percent of energy needs were
oil;
(4)
than
government
placed
deficits
a net
burden on the
representing
6 percent
-
of GNP could not be sustained
85 -
if
the economy we. to meet its
stated
development objectives.
Stabilization
Attempts 1980-83
Wlth a balance of payments deficit
government foroulated
facility.
assets
an adjustment
The measures
program supported
introduced
of the banking system,
of $580 million
included
and limits
limits
in 1979 the
by an IMF standby
on net
on new approvals
domestic
of foreign
borrowingsof 1-12 years' maturity. However,due to worseningworld
economicconditionsand risingoil pricesthe programturnedout to be
more difficultthan envisioned. The need for strengthening
long ters
policiesbecamemore apparent. A second standby facilitywas agreed
upon for 1983 to supporta short-termfinancialprogram. The aim of
the prograswere to reducethe budgetdeficitfrom $1.2 billionin 198Z
to $600millionin 1983throughtightermonetaryand fiscalpoliciesand
a flexibleexchangerate policy.
The need for structuralchangewas reflectedin the two 5-year
development
plans set out by the PhilippineGovernmentfor the period
1978-1987. Criticalto the successof the development
effortand the
structural
adjustment
program was an increase in the efficiencyof
investment,
reduced dependence on imported oil
of the manufacturing
sector
The Governamnt's
1980.
The first
and Improved performnce
and its export performance.
program of structural
refors
we
Initiated
phase of the programfocusedon trade,industrial
financialpolicieswhich were major factors
efficiency. The trade and industrial
in
and
behind the low invest_ent
policy
reform
were supported
under SAL1. They were complemented
by a financialsectorreformpackage
- 86
supported
by a Bank industrial
-
finance
loan.
The second
phase
of the
program was supported under SALII. Trade and industrialreforms started
under SALI were continued and new reforms in energy development and
conservationand public resourcemanagementwere initiated.
The StructuralAdjustment Program -- Objectivesand Policies of SALs
The economic analysis
and policy
recommendations
of the
SALs
were based on the work of the Philippine division and numerous World
Bank reports.
These include Domestic and External Resources for
Development (2674-PH), Industrial Development Strategy and Policies
(2513-PH),Aspects of the Financial Sector Report (2546-PH), Selected
Issues for the 1983-87 Plan Period (3861-PH), and an Energy Sector
Survey (3199a-PH).
Table
6:
PHILIPPINES:
Date of Approval
Loan
STRUCTURAL
ADJUSTMENT
LOANS
Amount ($m.)
Disbursements
5/7/84
as of
SAL I
9/16/1980
$200.00
$199.34
SAL II
4/26/1983
$302.30
$302.30
The major objectivesand policy
are summarized
in Table
7.
recommendations
of the two SALs
They representpolicy measures chosen by the
Philippine Government and supported by the Bank.
The major policy
changes, their Implementationand results are as follows.
Table
Area
Trade
-
Final
reduce
7:
PHILPPINES:
Objective
BOP deficit
lower import
SUKARY or OBJKC!IVES AND POLICY RECOMENDATIONS
OF TWO SALS
Intermediate
Objective
refors
tariff
and import
licensaig
regime
protection
promote
exports
Policy
maintain
Ins trument
a flexible
exchange
rate
policy.
adapt legislation
to establish
a system
even out spread of nominal tariff
rates
between 10X and 502
liberalize
702 of import
licensing
to
to
in stages
make all fiscal
incentives
provided under the
Investment
Incentives
Act also available
under
the Export Incentives
Act.
extend tax credit/duty
drawback facilities
to indirect
as well a direct
exporters,
and
increase
tax deductions
for domestic costs and
overseas
trading
offices.
reduce marginal deposit
requirewnts
on imported
inputs and Introduce
an advance tax credit within
seven days after
exportation
of their
finished
product.
liberalise
bonded manufacturing
warehouse
arrangements
so that they are available
to large
and small exporters
reduce Central
Bsnk rediscount
rate for nontraditlonal
exports and establish
Export and
Foreign Loan Corporation
to guarantee
loas
and
reduce risks of export financing.
reorganize
instItutions
establish
tak
forces
product groups
that prowote
on six prlorlty
trade and
export
Table
Are
Final
7:
PUILIPPIM S:S SUNWIA OF OIJCTIVKS
Objective
Intermediate
AID POLICY hIWD#Z
IOUS OI TWOSALA (cont 'd)
Objectlve
Pollcy
introduce
discourage
Instrumnt
hibgher taems on luxury Its"
noa-essential
consumption
to
revDe differential
tax tretm_nt
of imported
nd domestic goods and siMplify
the aduifstration
of tbese taxe
reform indirect
taxes
and excise taxes with
regime
Industrial
Reform
liprove
perfor mne of
industries
through inrase
growth, reduced capital
intenity.
more efficient
use of capital
and greater
regLonal dispersion
in an effort
to aliga sales
the nm tariff
and trade
restructure
industry
reform industrial
incentives
system to increase
Investment
efficiency
adopt concept of subcectoral
restructuring
program
to help existing
lndustries
adjust to
polUcy changes and develop sm-l and medium-scale
enterprise
introduce
setoral
maut progrm
crete
a full tlme team for sector studies,
initLate
sector program for the teztile
end
cement Industry
and Implement studles in the food
processing,
electronice
and mtal working
lndustrieo
develop-
adopt a policy of rigorous
economic evaluatlon
In selecting
lndustrieo
eligible
for facentives
Institute
a tax allowane
based on value-added
for
-A
invostmente
duritg
the first
five yeaor of
comercial
productlon
reorganixe
BIreau of Invstments,
retrain
staff
In
Industrial
pla ning. develop a Young Kanege r'
progra,
establish
a management inforemation system
g
Table
Are
7:
Final
PHILIPPINES:
Objective
SUNIARYo0 OBJECTIVES AND POLICY RECDOMMDARIONS
OF TWOSALS (coat 'd)
Intermediate
Objective
Policy
In trument
and improve industrial
statistics
through
strengthbning
of the Nationl
Census and
Statistical
Office
lnestment
Ince-ntives
lationlime
Incentive
investment
ystee
channel investments
to industrial
subsectors
where the Philippines
a comparative advantage
encourage employment generation
industry
growth outside Manila
bas
and
remove exs ting fiecal
incentives
with a
capital
cheapening bias like accelerated
appreciation, tax allownces
for reinvestments
of pre-operating
*xpenses and replace with
incentives
related
to perforeanc
rather
than
investment
per se
introduce
2 new performance
oriented
incentives
tax credit on net value earned and tax credit
on
net local content of export products
real econodic rate of return,
and Indicators
like
domestic resource
cost and the effective
protection
rate were introduced a lnvestment
criteria
encourag
Industrial
strealine
incentives
registration
gre ter
project
ue of econoalc
evaluation
analysis
procedures
for administerlng
of
- reduce lnformtion
requirements
for_
In
an
improve allocation
sstem
of inentives
by establishing
regional
office
available
to help
smell and regionally
dlpersed
firm
in the
Table
Area
7:
Final
PUILIPPIMS:
Objective
OF OBJECTIVES AND POLICY REECHNDIIONS OF TWO SA1S (cont'd)
SUMMARY
Intermediate
Policy
Objective
Instrument
procedures
and grant additional
administrative
area
in disadvantaged
to projects
incentives
reduce the bIhi level of
oll imports through
and diverse
increas_
*domestic energy production
and collervatimh
Emergy
plan in the areas of
adopt an investment
oil, gas,
coal production,
power generation,
and development
and geothermal
exploration
to replace petroleum
of energy through
conservation
encourage greater
prices,
an adjustment
of relative
diesel/gasoline
restructuring
of retail
electricity
rates and
increased
wholesale
power tariffs
initiate
retail
Energy Public
mesource Wanagement
Techeical
Assistance
reduce energy sector
on government
reliance
equity contrlbutions
of wholesale
study of the stru;ture
power tariffs and petroleum pricing
and
government equity
approve a plan to eliminate
by 1986 and fix annual equity
contributions
to finance
targets
to encourage power subsector
investment
through internal
cash generation
to strengthen
BOI's
hire teae of consultants
capabilities,
prepare
planning and analytical
programs,
and other sector restructuring
textile
on the job and overseas
training
for staff of the
Tariff
Comission,
and establish
an international
trade center.
-
91
-
The Budget - The indirect tax system which existed in the
Philippines effectively protected domestic industrieswith mark-up and
higher nominal rates on imports providing
a strong
incentivefor import-
substitution. This system was also very effective from the point
view of revenue generation.
of
The objectiveof the tax reform under the
SAL was to remove the differential tax treatment of imported and
domestically
produced
goods.
At the time the SAL was proposed, the
Bureau of Internal Revenues was unable to estimate the net revenue
effect of the proposed tax reforms. Preliminary estimates concluded a
revenue loss of f1.0 billion.
Reduction of equity contributions to
government corporations comprised a major portion of the effort to
maintain government revenues.
These measures are reflected in the
energy sector reforms.
Trade Policy - Tariff Reform and Trade Liberalization- The
objectives of the trade policy reforms were three-fold.
First, to
increase efficiency and international competitivenessof Philippine
industry.
Second, to reduce allocative distortions by lowering the
level of protectionand evening out tariff rates. Third, the government
hopes to improve the export regime through export promotionmeasures. A
variety of measures were taken to
achieve these objectives.
A
comprehensivetariff reform was legislated complementedby a program of
liberalizing import licensing. The first part of the tariff reform
covered 75 percent of
tariffs
of
40
the items in
the tariff code --
realigning
items in the food processing industry and 14 other
industry sub-sectorsover a period of five years. Peak tariffs were to
be reduced from 70 percent and 100 percent to 50 percent.
Minimum
-
92 -
nominaltariffrates were to be implemented,
and the differential
tax
treatmentof foreignand domestically
producedgoodsphasedout. Import
restrictions
were to be reducedin all but the nationalsecurity,health
and publicsafetysectors.
While compliance
with the tariffreformprogramhas been good,
by 1983 the balance of payments situationhad worsened, and the
Philippines
was facedwith politicaluncertainties,
and a growingdebt
service burden. In response,the peso was devaluedsubstantially,
governmentexpendituresreduced, new controlswere enforced on the
allocationof foreign exchange and an additionalimport duty of 3
percentwas levied in 1982 which was increasedto 10 percentin May.
New importrestrictions
had to be introducedand existingrestrictions
tightened. The import surchargetemporarilyreversedthe declinein
tarifflevels.
In orderto avoid any adverseeffectson revenuecollectionor
the balanceof payments,the SAL reformprogram relied on the IhF's
proposedflexibleexchangerate policyand measuresto increaseindirect
taxes in case import demand and private consumptionexpanded
significantly
as a result of the trade reforms. A $1 billiontax
packagewas incorporated
into the 1981budget. However,the government
failed to make compensatingadjustmentsin its exchangerate as is
reflectedin the appreciating
real exchangerate index for the period
1979 to 1982 (Table 8). This policywas correctedin 1983 when the
exchangeratewas depreciated
followingIMF recommendations.
Preliminary
data suggest that the programhad littleadverse
effecton tariffrevenues. The new systemof foreignexchangecontrols
- 93 -
authorizedthe CentralBank to administerall foreignexchangethrougha
centralpool based on high priorityuses. In reality,due to foreign
exchangeshortages,littleforeignexchangehas been allocatedto vital
domestic industriesor export industries,thus making some of the
reimposed import restrictions
redundant.
In order to strengthen
series
of measures
production,
facilities
including
simplifying
the export regime, the SAL recommended a
broadening
fiscal
procedures,
incentives
improving
for
export
export
financing
and strengthening
institutions.In actualfact,most of the
activitiesoutlinedin the SAL-Iagreementwere alreadyaccomplished
by
early 1980, in anticipationof the agreement,except for the policy
action to introducestandard costinge and allowance for the duty
drawback system which wa
not implementeddue to private sector
resistance. One point of note is that the SAL doesn't include any
assessment
of
the
export
categories
in the
world
greatest
potential
analysis
may have occurred
where expansion
market.
While this
would have the
kind
in the design of the SAL, it
of formal
is not clear
from the document itself.
InvestmentIncentives
and Promotion Policy
- New industrial
promotionpolicieswere implementedunder the SALs in an effort to
improveinvestment
efficiency,
simplifythe administration
of incentives
and strengthenthe industrialinstitutionsas a seans to reduce the
anti-export
bias of the trade regime. Reformsin this area were aimed
at increasingcompetitiveness
and industrialefficiencythroughfiscal
incentive
incentives,
measures,
and sector
more
rigorous
programming.
analysis
of
Five months after
eligibility
for
the new policy
J1
-
94
-
became effective,70 percent of new applicationsfor projectswere
export-oriented
projects.
In the area of industrial
restructuring,
the
cement and textile industries are currently under modernization.
However, of the seven sectoral studies planned for 1983, only the
electronics
and food-processing
industrystudieshave been completed.
Energy Reforms- The purposeof the energy reformprogramwas
to acceleratestructuralchangesin the sector.
The main objectives
were to diversifyenergy sources,improve conservationand generate
funds for energy investment. The measuresadoptedincludedan energy
investmentplan, improvedresourcemobilization
from within the power
subsector, increased wholesale power tariffs, restructuringof
electricityrates, adjustmentof petroleumproduct prices, and the
initiation
of a petroleumpricingand a powertariffstudy.
The programhas made significantprogressin its attemptto
develop domesticenergy resources. During 1982 power generationfrom
geothermalstream increased by approximately18 percent and coal
consumption almost doubled.
According to recent
importedoil droppedfrom 73 percent
estimates
dependence on
in 1981 to 65 percent in 1983.
An
importantelementof the energyreformprogramwas to improveresource
mobilization
from within the power subsector. Equity contributions
to
financeits investment
programamountedto one-fifthof the government's
budgetarydeficitsin the past. Reformsproposedunderthe SAL included
increasinginternalcash generationthroughpower tariff increasesto
financeinvestment.This was successfully
achieved.
FinancialSector Policies - Reforms were introducedby the
Governmentin 1981 to complementtradeand industrial
policychangesset
- 95 -
forth in the SAL.
The objectiveof these
reformswas to promote
savingsand increasethe availabilityof long term finance. Banking
legislation
was changed,and interestrateswere deregulated,
resulting
in positivereal interestrates for the firsttime in threeyears. The
governmentprovided fiscal incentivesfor term lending and equity
investmentand a lender-of-last
resortfacilitywas established
by the
CentralBank. These reformswere hamperedby a crisisof confidencein
non-bank financialintermediariesin the beginningof 1981.
Many
companiesbecameinsolventand couldn'trepaytheirloans.
Although it is difficult to measure the impact of the
adjustmentprogramin the Philippinesbecauseof the influenceof the
world recession,
this discussion
may add furtherinsightinto the issues
addressedin this paper.
96 -
-
Table
8s
PHILLIPPINES
8oM ECONOMICINDIC&ORS
1979
1980
1981
1982
1983
GDP
6.3
5.3
3.9
2.9
1.1
Industrial Value Added
8.0
4.7
4.5
2.1
0.7
AgriculturalValue Added
4.5
5.0
3.7
3.1
-2.1
12.1
6.6
3.5
0.9
-3.0
Total imports (million US$)
8,108
10,348
11,151
Total exports (million US$)
6,256
8,010
8,618
8,004
8,138
Agriculturalexports (million US$)I/
2,094
2,268
1,952
1,670
1,612
Non-traditionalmqnufacturingexports
(million US$)JJ
1,474
2,005
2,374
2,376
2,387
820
1,174
976
687
607
399
Growth Rates
(2)
Total fixed investment
Mining
Other
exports
exports
(million
(million
US$)-I/
11,690. 11,354
213
241
420
288
4,601
5,788
5,722
5,021
Current account deficit/GDP (Z)
5.0
5.4
5.4
7.9
8.1
Central government deficit/GDP (Z)
0.1
1.3
4.0
4.3
2.0
Private investment/totalfixed investmnnt(Z) 73.0
67.1
61.9
62.8
65.8
Inflation (2)21
15.2
15.5
11.1
8.4
11.7
Unemployment (2)
4.2
4.8
5.4
5.8
4.9
10.8
18.1
21.1
16.1
18.6
100.0
95.0
92.0
89.0
106.0
US$)LI
Total merchandise exports (million USS)
Growth of Honey Supply
Real Exchange Rate /
1/ Merchandise trade
Y/ 1978 GDP deflator
T/ An increase in the index corresponds
to a depreclation
5,005
-
B.
1.1
97 -
SURVEY 0P ADJBWE
ISSUES
Introduction
The Bank's StructuralAdjustmentLoan program may be seen as a
response to two related recent trends. There was first the development
of persistent and unviable balance of payments deficits by many
developing countries in the 1970s and early 1980s.
The oil crisis,
world recession, and related events ensured that these deficits would
not be merely temporary and amenable to external financing or monetary
demand curtailment,but would require more fundamentaladjustmentof the
debtor economies. Secondly, this historical shift was mirrored by an
evolution of views about stabilizationpolicy which become increasingly
skeptical
that
relatively
narrow
demand-based
stabilization were by themselves sufficient.
approaches
to
Analysts became more
concerned with distortions, bottlenecks, and structural rigidities in
developing economies which could constrain the balance of payments
adjustmentprocess; their interest shifted from short-termstabilization
to more gradual structural adjustment.
Many policy makers came to
accept the view that the eliminationof external paymentsdisequilibrium
must proceed gradually and on many fronts to avoid costly side-effects
of short-termstabilization.
Little academic research has been focused upon the proper
design of structural adjustment programs per se.
However, the growing
literature on international disequilibrium and economic stabilization
touches upon a wide
variety of issues important to medium term
structural adjustment as well as to short run stabilizationpolicies.
-
98 -
While this literature by no means provides comprehensiveand sufficient
guidelines for SAL design, it certainly makes important contributiona
toward this end.
The following pages are intended to highlight those
issues currently being discussed which are especially pertinent to the
constructionof structural adjustment programs. Section 1.2 discusses
the relevanceof a preliminary issue: the sources of macroeconomicand
external payments imbalance.
sumary
of
literature.
This is followed in Section 1.3 by a
different broad adjustment modes
identified in
the
Section 1.4 focuses upon the impact of the different
specificadjustmentand stabilizationpolicies themselves,while section
1.5 discusses the overall design of consistent, effective structural
adjustment programs.
The
distribution effects of
final two sections examine the income
structural adjustment programs and their
consistencywith global economic trends.
1.2
Sources of External and InternalImbalance
A prominent source of controversy in the literature has been
the source of the marked payments disequilibriumexperienced by many
countriesin recent years: these are often divided into external shocks
and inappropriate domestic policies.
External shocks are generally
defined (Mitra 1983) to include adverse terms of trade changes and
autonomous (from the exporter's standpoint)declines in export volume;
to this list may be added rises in the interest rate on external
borrowing,
years.
which made a major impact on debt service burdens in recent
Another factor
which may become increasingly
1980s would be fluctuating
capital
flows,
important
in the
though StanleyBlack (1983)
argues they were probably less important in earlier decades.
-
99
-
A wide varietyof policiesare consideredto have been domestic
contributors
to externalpaymentsimbalances. They include policies
promotingexcess demand, fiscal deficits to finance high cost, low
productivity
investmentprograms,associatedexpansivemonetarypolicy,
and policiespromotinghigh wage growth. Policiesreducingoverall
efficiencyand especiallyexport supply are also noted: overvalued
exchange rates, high cost protectionpoliciesand misdirectedprice
controlsin productand factormarkets.
The debateas to the relativeweightof thesefactorsoccursat
both the country-specific
and the aggregatelevel. As an exampleof the
latter,Black used discriminant
analysisof cross-country
data for the
1970s to show that while externalfactorswere important,the domestic
policiesof these countrieswere shown to be better correlatedwith
theirdegreeof externaldisequilibrium.
On the otherhand,SidneyDell
(1983)focusedupon the 1978-81periodand arguedthat the oil shockand
the rise in interestrates were the crucialdeterminants
of payments
imbalance. He notes that the combinedcurrentaccountdeficitof the
net oil-importing
developingcountriesrose from $30 billionin 1978 to
$80 billionin 1981,while increasedoil and interestrate costsalone
rose $70 billion. Hence,he contendsthat thesecountriesused domestic
by externalshocks.
policyto adjustsubstantially,
but were overwhelmed
There appearsto be some consensusthat the weightof external
though internal
shockshas been more importantin paymentsimbalances,
factorshave been especiallyimportantin the adjustmentresponseto
externalshocks. However,as structuraladjustmentprogramstend to be
designedon a country-specific
basis, it is not clear how useful an
aggregatecharacterization
will
be to SAL design. Moreover,it is not
-
100
-
clear how meaningful the internal/externaldistinction itself actually
is. As already mentioned, a country pursuingpoor domestic strategymay
not actually cause a payments imbalance, but may be unable to adjust
satisfactorily to a mild external shock.
Taken from a different
perspective,the expansionaryfiscal policiespursued by many developing
countries in the
1970s were
supported by
the readily available
commercialcredit deriving from OPEC's surpluses. In the absence of the
availability of
that credit
(clearly an
external factor), many
counterproductive domestic fiscal policies might
not
have
been
undertaken.
The importance of the distinction between the external and
internal sources of imbalance must be understood in context.
Dell's
control
argument
is
that
if
the
origin
of imbalance
of the developingcountries,it is
extends
(1) inequitable
Sidney
beyond the
to force
them
to bear the entire adjustment burden; and (2) inefficient as well, for
internationalcooperation and financing would serve to reduce overall
adjustmentcosts. While this issue is important in its own right, it is
less relevant to the design of SAL programs. First, country-specific
SAL's must take the internationalenvironment as a given, and at the
moment there exist no internationalcooperationprogram of the sort Dell
proposes.
And in any event, SAL designers must always take care
identify the specific causes of imbalance internal/external
1.3
distinction
Modes of Adjustment
Three
different
per so is less
to External
broad
to
it is merely that the
crucial.
Disequilibria
modes of adjustment
to external
payments
imbalances have been identified in the literattare. These Include
the
-
reduction
exports
financing
of
excess
demand
and import-substitutes
of a country's
absorption (GDP -
-
(expenditure-reduction),
the
(expenditure-switching),
payments
Expenditure-reduction
101
promotion
of
and the external
obligations.
concentrates
on
reducing
domestic
exports + imports) in relation to aggregate supply
(GDP) to reduce the current account deficit and inflation.
principle, this can either
In
be achieved through a decline in domestic
final demand which reduce imports or an increase in output which
replaces imports or increases exports. 1/
In practice,'increases in
output are consideredto increase imports (for reasons to be discussed
below), and the focus of adjustment is upon decreasing absorption.
Expenditure-reduction
is therefore most appropriatewhen excess demand
underlies the payments imbalance,as opposed to, say, a misallocationof
resourcesbetween the traded and non-tradedgoods sectors.
Within the category of absorption reduction, the choice still
remains between decreasing investment, on the one hand, and raising
savings on the other. Accordingly,Mitra (1983) defines two adjustment
modes: "investment slowdown' and "domestic resource mobilization". In
fact, domesticresource mobilizationIs consideredoverly time-consuming
and difficult for short-run stabilixationprograms - it requires either
raising taxes to increase government savings or promoting changes in
financial sector to
change private savings/consumptiondecisions.
Expenditure reduction is therefore generally associated with fairly
costly reductionsin investmnt, output and economic activity.
1/ Keller (1980) accordingly argues that increases in working capital
to stablisation
are suitable
financing which promote production
programs.
- 102 -
Expenditure-switching
policiesattemptto shiftoutputfromthe
home goods to the traded sector by promotingexports and importsubstitutesproduction. This approachis consideredto entail less
costs than the expenditure-reduction
strategy,but is less fast acting
on the trade deficit,and hence may requireexternalfinancingfor the
transitionalperiod.
Expenditure-switching
is most likely to be
appropriate
in responseto some externalshockwhich createsa need for
greater exports and reduced imports,even though a state of excess
demand does not necessarilyprevail. The linkingof adjustmentmode
with sourceof imbalanceshouldnot be takentoo far,however. As Mitra
points out, an increase in oil prices not only requires a trade
adjustment,
but becauseit lowersthe economy'srealincome,requiresan
adjustmentof finaldemandas well.
The final adjustmentmode, externalfinancing,is considered
appropriate
for transitory
payments imbalances,
but not for persistent,
fundamentaldisequilibria.The eventsof the last few years indicate
how dangerousthe accumulation
of externaldebt can be in a turbulent
international environment with
fluctuating interest
rates.
Nevertheless,external financing can play an important role in
conjunction
with other adjustmentmodes duringthe transitional
period
precedingfullpaymentsadjustment.
Considerable
researchhas been undertakenat the Bank and the
OECD to determinethe incidenceof adjustmentmodes across different
countries(Balassa1983, Mitra 1983). These studiesdraw distinctions
between (among other things) "outward-looking"
and "inward-looking"
countries.Outward-looking
countriesprovidesimilarIncentivesfor the
- 103 -
production of both domestic and export goods, primary commodities and
manufactures. They include among their ranks Korea, Singapore,Taiwan,
Chile, Uruguay, Kenya, Mauritius,Thailand and Tunisia. Inward-looking
countries,by contrast, bias incentivestructuresagainst the production
of exportables and primary commodities.
Examples include Brazil,
Portugal, Turkey, Yugoslavia, Argentina, Israel, Mexico, Jamica, Peru
and Tanzania.
Balassa argues that while
the
outward-looking countries
suffered greater external shocks, relative to their GDP levels, than the
inward-lookingnations, they were able to more successfully Implement
expenditure-switching
policies with less relianceon external financing
or economic contraction. The major reason for this was the outwardlooking country's less
active
government discrimination against
particular sectors. Not only was greater overall micro-efficiencythus
promoted, but the relative absence of distortions and structural
rigidities meant that different sectors were able to demonstrate the
greater flexibilityneeded to respond to the relativeprice changes and
other shocks provided by the internationaleconomy.
This distinctionwas crucial, for it will be argued in the next
section
that
a key
feature
of
a
structural
adjustment
program,
as
opposed to a short-term stabilizationprogram, is to heighten the
responsivenessof the economy to policies or changes in the economic
environment; this is to be accomplished through elimination of those
factors inhibiting flexible response to shocks.
economies
1970s
with
which
entered
flexible,
the
turbulent
responsive
international
economies were
Outward-looking
environment
of the
more easily able to
eschew costly adjustmentmodes in favor of easier transitions.
- 104 -
1.4
Impact of Stabilizationand StructuralAdjustmentPolicies
In the preceding pages, the terms stabilizationand structural
adjustmenthave been used recurrently,but no clear distinctionhas been
drawn between them. A reading of the literaturesuggests a variety of
possible dividing lines:
1.
Stabilization is a short run (one to three year) set of
policies,
while structural
adjustment
is a medium term (three
to five years or more), gradualistpolicy.
2.
Stabilizationuses demand managementto cause contractionsand
diminish
imports,
where structural
adjustment
acts
on the
supply side to expand productionof exports.
3.
Stabilization
is what the Fund promotes with its Standby
Arrangements;
structural
adjustment
is pursued through the Bank
SALs and, to some degree, the Fund's EFFs.
While
all
those
deliniations
make important
points,
none
of
them fully capture the distinction between stabilizationand structural
adjustment.
This distinction certainly encompasses more than the
administrativedivision of labor noted in #3.
Most IMF programs, and
particularly the EFFs, contain measures which would be thought of
falling in the structural adjustment category.
Moreover, while
stabilizationand structural adjustment are highly dissimilar in some
respects, they complement each other in the design of complete policy
packages, and this complementarityhas resulted in effective Bank/Fund
collaborationin designing SAL and standby program.
goes
beyond
adjustment
achieve
temporal
dimension
are
merely
policies
more slowly;
achieve
the
they
are
more ambitious
results.
not
a wider
objectives,
Finally,
the
set
suggested
stabilization
of policies
require
in
The distinction
#1.
policies
which,
Structural
implemented
by striving
more time to put in place
to
and
supply side/demand side distinction
- 105 -
cannotbe pushedtoo far either. The exchangerate devaluation
so often
reco_ nded in the stabilization
programsacts to encouragethe supply
of exportsand import-substitutes
by increasingtheir relativeprices
and enhancingtheir profitability;
conversely,SALs routinelyinclude
measuresto increasesavingsratesand decreaseinvestments
in order to
reduceabsorptionrelativeto output.
The crucial featuresof a stabilization
package per se are
first, it attempts to correct the balance of payments deficit
exclusively,and second, it takes the parametersdeterminingan
economy'sresponse to policy instrumentsas given, and attemptsto
manipulate these policy instrumentsexclusively to achieve its
objectiveswithinrelativelyshorttime horizons. Hence,
stabilization
a typicalstabilization
programmay focusupon a contraction
of monetary
growth (and of demand) and on an exchangerate devaluation. In the
short term, and in the absence of additionalpolicy actions, the
expenditure-switching
effectsof the devaluation
may be quite limited;
achievementof BOP equilibriumthus reliesupon severecontractionof
economicactivity,exploitingthe strongparameterlinkingimportsand
output.
The purposeof a structuraladjustmentprogram,on the other
achieve payments deficit reduction,the
hand, is to simultaneously
of structuralchanges
resumptionof outputgrowth,and the achievement
problems. And in
neededto preventfuturepaymentsand stabilization
the approachof structuraladjustmentis not
contrastto stabilization,
but to undertake
only to manipulatethe primary policy instruments,
of the stabilization
other actions to increase the responsiveness
-
objectives
to those
structural
adjustment
instruments.
policies
106 -
Referring
to the simple
would include
example above,
sectoral/micro
reforms
to
increase the responsivenessof exports and imports to devaluation,and
budgetary/financial/sectoral
reforms to decrease the responsivenessof
current account deficits to the growth of output. Thus, while short
term stabilization takes the parameters of an economy's response to
stimuli as fixed, structuraladjustmentexploits a longer time frame to
be able to transform the parametersof response themselves.
The
following summary of issues associated with specific
adjustment policies is organized along the lines of this conceptual
framework. For each of the two major adjustment modes, expenditurereduction and expenditure-switching,the major "stabilization"policies
are described and discussed. This is followed in each case by a survey
of the "structural adjustment" policies associated with the broader
adjustment mode and which condition the response of the economy to the
major stabilizationpolicies.
1.4.1
ExpenditureReduction Policy
Within
the
broad
expenditure -
or
absorption-reduction
adjustment mode, the most frequently recommended stabilizationpolicy
tends to be a decrease in domestic credit creations in order to reduce
the current account deficit and also contain inflation. This credit
contraction represents the mainstay of the "monetary programming"
approach dating from the 1950s; its rationale was well described in
Polak's "Monetary Analysis of Income Formation and Payments Problems",
(1957). This monetarist approachis based upon the belief that excesses
-
107 -
in the demand or supply of monetary balances are adjusted through
inflowsor outflowsin international
reserves.A country'smoneysupply
is a functionof its money multiplierand its.base, which in turn is
comprisedof internationalreserves and central bank loans to the
governmentand the privatesector. For a short time frame in which
nominal income may be consideredfixed, declinesin domesticcredit
creationare thoughtto lead to excessdemandsfor moneywhich can only
be satisfiedthrough internationalreserve inflows,i.e., a current
accountsurplus;in the longerrun, reducedmoney growthis believedto
restraininflationas well.
This monetaristrationalefor the effects of domesticcredit
creationis entirelycompatiblewith a more Keynesianor absorptionorientedexplanation.This approachholds that a declinein domestic
creditcreationleads to falls in aggregatedemandwhich lowerthe gap
between absorptionand aggregatesupply and in this way reduce the
deficitbetweenimportsand exports. This standardabsorptionapproach,
on the other hand, Is contestedby those of a more structuralist
inclination.They contendthat currentaccountdeficitsdo not arise
merelyfrom a spilloverof absorptionover supplyand into imports,but
from a mismatchof the structuresof demand and supplysuch that the
excess demands for some products,especiallyimportantintermediate
goods, co-existwith excess suppliesof others. Trade deficitsare
thereforelinked not with the excess of absorptionover aggregate
supply,but with actual levelsof output. Domesticcreditcontraction
- 108 -
acts to reduce the trade deficit not by reducing absorptionper se so
much as by reducing output and activity levels. 1/
While there is general consensus upon the ultimate ability of
contractionary monetary/fiscal policy to reduce the trade deficit,
people with different views about how these processes work have
different evaluations of
the
marginal effectiveness of
credit
restraint. Those stressing the pure absorption approach will tend to
see these policies as being more effective and having fewer costs in
activity than those
of
a
more structuralist inclination.
The
implication of Keller's (1980) absorption-based analysis is that
reductionsof credit for fixed investmentand consumption,combinedwith
steady or increased financing of working capital requirements,would
increase output, the savings rate, and net exports as well. Dell (1983)
points out that the presumptionof easy, flexible expenditure-switching
must underlie
exclusively demand-based approaches to stabilization.
Those stressing the inflexibility of derived demands for imports, as
well as the short-run inability to muster domestic substitutes,would
expect an improved current account deficit only after considerably
greater monetary restraint and real contraction. A growing belief that
structural obstacles to expenditure-switchingexist and play important
roles has found adherents in the Fund as well as in other institutions
(Crockett1981).
1/ See Schydlowsky's comments on Cline's analysis of the Peruvian
situation in Cline and Weintraub (1981). He contends that because
Peru's problem in the mid-to-late 1970.wa misallocatedrather then
insufficient supply capacity, the country's strenuous deoand
reductionpolicies were inappropriate.
-109-
limitsto the effectiveness
Aside from these more fundamental
of credit
-pointed
external
balance,
implementation
problems
in achieving
restraint
to some technical
these problems relate
to determining
has
the literature
Some of
as well.
Dell notes that
the targets.
it is
aggregatethe targetis: central
not clearwhat the most appropriate
credit,
bank domestic
broader
liquidity
Ml, or some broader liquiditymeasure. The
measures may be more impotant,
but are less
easily
controlled. Moreover,even with the liquiditymeasure determined,
its
will be dependentupon largelyunknownparameters
link with absorption
of the moneydemandfunction. Finally,the discussionabovehighlights
the difficulty
(Crockett
the appropriate
of determining
final
demand level
itself
1981).
Once targetsare set, hittingthem is likelyto be difficultas
well. Since many developingcountrieshave poorly developedcapital
throughthe government
markets,creditpolicywill often be implemented
fiscal deficit. This is much more difficultthen, say, open market
in the shortrun, and as Sharpley(1984)points
operationsto manipulate
policy than long term
out, is less appropriateto countercyclical
adjustment.
Sharpley
also
notes
the existence
of large,
informal
or
curb" aarketsfor funds in developingcountrieswhose indirectlinks
with formal capital marke
make monetary control even harder.
Finally,Dell points out that even developed
countries
have trouble
countriesshouldfind It even
hittingtheirmonetarytargets;developing
of
Killick,at. al. stressthe replacement
more difficult.Accordingly,
quantitativetargets with more flexible review indicatorsin their
for policy reform (Killick,Bird, Sharployand Sutton
recoum_ndation
1984).
-
110
The considerationslisted above point toward factors
the
effectiveness or
ease
of
implementation of
reducing
monetary/fiscal
contractionas a stabilizationtool. Another strand of criticism in the
literature
policies,
possible
Taylor
focuses
their
upon
potential
effectiveness
inflationary
(1981) argues
potential
that
negative
side-effects
aside.
One such
of
contractionary
monetary
contract
ons
of
side-effect
monetary
which
force
these
is
the
policy.
up
the
interest
rate increase the cost of working capital, which in turn
directly
raises
production costs and hence prices while reducing the
output of affected firms. Most developing countries,however, tend to
combine low administered interest rates with credit rationing, so that
monetary contraction is associated with declines in rationed credit
rather than increases in the interest rate. On the other hand, formal
rationed credit markets often co-exist with informal credit markets
offering capital at much higher, competitivelydeterminedrates. Bruno
(1979) shows that declines
in formal credit allocationswill push many
firms to the high priced curb markets for working capital financing,
raising
costs and prices.
In his comments on Taylor (1981), however,
Kemal Dervis points out that these inflationaryeffects will usually
short lived.
be
In general, the empirical evidence does not support an
actual negative correlation between the money supply and inflation
(Cline 1983). 1/
Nevertheless, these considerations suggest that
monetary contractions will
effect
costs and
prices in
certain
industries, particularly those with limited access to formal credit
1/
For a notable exception,see van Wijnbergen (1982).
-
III
-
outlets;this could in turn have important consequencesfor sectoral 104
source allocation.
Perhaps a more problematic aspect of conventional absorption
reduction measures is their focus on investment reductions,since this
limits future output growth and perhaps more importantly, hinders
attempts to shift relative sectoral capacities toward tradeable goods.
As pointed out above, it is often easier, in the short run, to reduce
investment than increase government tax revenues or change private
consumption/savingsdecisions.
In their recommendations,Killick et.
al., point out that policies to protect investment and raise savings
instead are crucial.
output
capacity
Policies which depress investment and future
guarantee
persistant
internal
and
external
disequilibrium.
To
conclude the discussion of contractionary stabilization.
policy one can point to a variety of structural rigidities in the
developing economy which force attempts to reduce the output-absorption
gap to rely exclusivelyupon costly output and investmentreduction:
1.
Sectoral rigiditieswhich prevent smooth productionshifts from
non-traded to traded goods, as well as other bottlenecks
inhibitingoutput expansion.
2.
Ineffectivetaxationsystems which burden short-runattempts to
raise government revenue, as well as inefficientmoney-losing
public sector activities.
3.
Underdevelopedcapital markets and financial regulationswhich
limit private savings mobilization.
It is obvious that in the absence of these rigidities,the same
current account balance improvementachieveableby strong contractionary
policy could be had through a combination of increased tax revenues,
increased private savings mobilization, expenditure-switchingto the
- 112 -
tradeable goods sector, and more moderate monetary restraint.
A
structuraladjustmentprogram's intent is to reduce these rigiditiesand
hence enlarge the parameters of the economy's response to policy
action.
Structural adjustment policies relating to #1, expenditureswitching, will be mainly discussed in 1.4.2. However, it should be
remembered
only
to
that
the
elimination
expenditure-switching,
absorption gap.
Hence,
credit
can
policies
resources
and
reduction
but
maximize
the
the
output
Policies
bottlenecks
public
investment
return
to
and
growth
associated
in many SALs, are of a rather
much attention
in the
is
important
also to reducing the
appropriate
moderate
policies.
prominently
received
of supply
available
costs
with
nature
Some issues
output-
selective
investment
of
#2,
technical
literature.
and
not
expenditurewhich
figure
and have not
concerning #3,
private savings mobilization,have arisen.
A widely recomm_nded strategy for private savings mobilization
has been liberalization of the financial sector.
Work by McKinnon
(1973) and Shaw (1973) argued that the financial sector plays an
important role in economic development by both mobilizing private
savings and
efficiently allocating them to
investments. 1/
In mny
lending rates are regulated
the most productive
developing countries, however, deposit and
and kept
at
below equilibrium
levels;
high
inflation rates often yield negative real lending and deposit rates.
The effects of this (Sharpley 1984) are thought to lnclude lower savings
1/
For a survey, see Fry (1982).
-
113 -
rates, 1/ credit rationing,the failure of rates to discriminatebetween
good and bad investmentprojects, a related bias toward highly capitalintensive investments,and the development of informal curb markets for
credit.
All of these tend to restrict the benefits of financial
intermediation. It is felt that the elimination of many restrictive
financial regulations would not only reverse these impacts, but also
reduce
increased
intermediation
costs
in
the
banking
sector
by
introducing
competition.
In general, there is considerable consensus that financial
liberalizationis important and necessary.
A number of potential
problems with an overly rapid implementationof the program have been
noted however. First, Foxley (1981) has pointed out how large rises in
the lending rate may raise working capital costs and hence prices for
the affected sectors. This effect would be accentuatedif combinedwith
standard monetary contractions,so that many firms would react not only
by raising prices, but by reducing inventories and output. Whether or
not increases in deposit rates increase private savings rates, It is
also likely that they would divert savings from informal to more formal
credit markets.
In the long run, this should lead to more efficient
savings allocations, but
in
the short term this could lead to
disruptions of the flow of working capital to sectors traditionally
dependent upon the curb markets for financing. Thus, abrupt financial
liberalization,especially combined with credit contractions,may have
1/ For a critical analysis of the interest elasticity of savings in
developing countries,see Giovannini (1983).
- 114 -
transitoryoutput reducingeffects; it is important to ensure that these
do not concentrate
in the export or import-substitutingsectors duriltg
the adjustmentperiod.
1.4.2
ExpenditureSwitching to Exports and Import Substitutes
The most prominent stabilizationtool for expenditureswitching
has been the devaluation of the exchange rate. This action is intended
to raise
the domestic
and hence
currency
price
of tradeables
vis-a-vis
home goods
shift production toward the former (and to a lesser degree,
demand towards the latter). Most analyses assume the devaluing country
to be a price taker in world markets, so changes in exports and imports
result solely from domestic agent decisions.
Unlike absorption-
reduction policies, devaluation is considered expansionary, since it
increases production and curtails demand leakages through imports. An
important technicalissue in implementingthe devaluationis the type of
devaluationapproach chosen: a "maxi-devaluation",
a series of "mini's"
(sliding peg) or both.
At the time of program implementation,the
country's exchange rate may be considerablyovervalued,so a large stepdevaluation would be in order.
Following this, a series of mini-
devaluations may be called for to protect the new real exchange rate
from appreciationthrough domestic inflation (Krueger 1981).
There
are a
variety of factors which are
considered to
condition the effectivenessof exchange rate devaluationsin reducing
external payments imbalances. One of the most controversialis the
effect of the devaluation of raising prices and hence undermining the
real
effects
of the nominal
devaluation.
There
is
no consensus
as yet
- 115 -
on how much devaluationscontributeto inflation,but it clearly depends
upon the share of tradeables in the country's GDP, the degree of
substitutabilitybetween tradeables and non-tradeables,and the degree
to which workers and firms can pass cost increases on to consumers in
the economy. Bird (1984) notes the possibility that the improved trade
balance caused by the devaluation could induce reserve inflows which
would expand the money supply and thereby raise prices; this effect,
however, could be sterilizedthrough correspondingcredit contraction by
the monetary authorities.
devaluation
very
may not be as pronounced
unlikely
either.
It is clear, therefore, that the real
to
be completely
eroded
as the nominal
by the
devaluation,
resulting
price
but is
increase
And as already suggested, the full real devaluation can be
protected by adoption of a "crawlingpeg" which depreciatesthe exchange
rate at the rate of price increase.
A key determinantof the effectivenessof the devaluation will
be the supply response of exporters. While evidence appears to point to
fairly high responses,this will vary from country to country, depending
upon the capacityutilization of the export sector and/or the gestation
periods associated with investments in more capacity or in expanded
crops. Hence, non-traditionalmanufactured exports from middle-income
developing countries will show quick response, while primary exports
from less developed economies may be expected to demonstrate very low
short-runelasticities.
The responsiveness of import demand and import-substituting
supply to devaluation is not expected to be as important to trade
deficit reduction as the export side. First of all, many countries have
-
116 -
a great variety of import quantity restrictions; the effect of a
currency devaluation is to lower the profits of import licencees more
than to raise the price of imports to consumers (Krueger 1981).
Secondly,many developingcountrieshave, through many decades of tariff
protection, already suppressed the importation of most consumer goods
and other inessentials.
The only imports remaining are essential
intermediategoods and capital goods characterizedby fairly inelastic
derived demands; moreover, these are the types of goods developing
countrieswould have difficultyproducing themselvesin the short-run.
Finally, the setting of the proper exchange rate itself emerges
as
a
serious implementation problem.
Many analysts agree that
devaluation targets are often set on the basis of overly crude
purchasing power parity considerations,and feel the need for a more
sophisticatedapproach. An example of this may be Nashashibi's (1980)
work on Sudan; he calculates the DRCs for Sudan's key export industries,
suggestingthe exchange rate be chosen where maximal output response can
be expectedfor the least devaluation.
While the considerationslisted above will tend to condition a
devaluation's effectiveness in any particular country, there is, as
already noted, general agreement on at least the medium term efficacy of
the tool in spurring net exports. The thrust of more recent criticism
of the policy tends to focus on possible stagflationaryside-effectsin
the
been
short-run.
discussed.
potential
the
The inflationary
A variety
potential
of
of a devaluation
hypotheses
suggest
a
has already
contractionary
as well. A monetarist approach (Dornbusch1973) focuses
devaluation
caused
price
increases'
effect
on real
upon
balances; with
117 -
-
increasedprices,the value of the real money supplydrops,as well as
real credit; exerting a contractionary
effect. This will act to
reinforcethe contractionary
impactcomingfrom restraintof domestic
credit creation. Krugman and Taylor (1978)note that if devaluation
takesplacewhen the trade balanceis initiallyin deficit,and imports
are inelastically
deuanded,the effectof risingtradeablespriceswill
be an aggregate
real
income loss as the expenditures
diverted
to imports
will more than offsetthe increasedprofitsenjoyedby exporters.This,
too, will be contractionary
as income is leaked through imports.
Finally,Taylor (1981)examinesthe effectsof increasesin the price
level caused by devaluation
which exceed the growth of nominalwages.
He suggeststhat a shift of real incomefrom high consumingworkers to
lowerconsuming capitalists
savings
leakage
will
and thereby
tend to reduce final
cause a contraction.
demand through a
According
to Bir
(1984),thisprocesswas evidentin Argentinain 1979.
In interpreting
these theoriesof stagflationary
devaluation,
it shouldbe understood,
first,that theyall replyupon an inflationary
effectwhich may or may not be very strong,dependingupon the country
Involved. Secondly,they are theoriesof short-runeffectand shouldbe
viewed more as factorswhich could cause overkillby domestic credit
contraction
thanas importantindependent
forcesin themselves.
The extentto which the contractionary
effectof a devaluation
offsetsits expansionary
impetusreflectssectoralrigiditiesinhibiting
full
supply
parameters
export
and demand responseto the
in particular
supply with respect
determine
this
to tradeable
exchange
rate
change.
Two
response,
the
elasticity
of
goods price
changes,
and the
-
118
-
elasticity of import demand with respect to them. The following pages
will review a variety of structural adjustment policies intended to
enlarge these elasticities as well as to more directly shift resources
into the tradeablegoods sector.
The most important
support
of
element
in structural
expenditure-switching is
adjustment
programs
considered to
be
in
trade
liberalization. Many developingcountrieshave histories of high tariff
and non-tariff protective barriers; the effect of these has often been
to raise costs, lower productivity, produce incentive biases against
exports, and introduce a variety of other distortions. The elimination
of quantitativeimport restrictionsand the loweringand rationalization
of tariff barriershas been a goal of most SALs and many IMF programsas
well.
The program is consideredto have a variety of important impacts
(Krueger 1981).
First, it lessens the incentive bias toward import-
competing industries and against exports. Secondly, it reduces export
costs and acts to increase export supply by decreasing import costs,
both directly through lowered tariffs and indirectly by promoting the
greater general efficiency of the industrial sector.
Thirdly, the
rationalization of tariffs tends to reduce the bias against labor
utilization implicit in the lower tariffs traditionally applied to
capital good imports. Hence, trade liberalizationis intended to be a
central tool in achieving greater micro efficiencyand aggregate output
in the medium-run.
Nevertheless, like many
stabilization policies thus far
considered, Krueger notes that a decrease in protection may cause
transitory losses of activity if newly profitableindustries need time
-
119
-
to expand outputwhile others lose their viability. This will depend
upon the degree to which tariffs and other barriersare lowered,the
initialheightof the protectivebarriers,and the degreeof uncertainty
aboutthe permanence
of the policyshift. Moreover,if no strongexport
responsewas forthcoming,
increasesin importscouldoffsetthe intended
*trade balance benefits of an associatedexchange rate devaluation.
Finally,it is importantto realizethat one of the objectsof trade
liberalization
is the unificationof tariff rates; this may involve
actuallyraisingrateson importedcapitaland intermediate
goods,with
accordingadverseaffectson the coststructuresof someindustries.
Closelyassociatedwith trade liberalization
is a secondmajor
structural adjustment tool, price control liberalization. Many
developingcountrieshave developedwidespreadsystemsof wage and price
control. These havehad the generaleffectof promotingdistortions
and
inefficiency
in resourceuse, reinforcing
the impactof trade barriers
in rasingproductioncosts.
They have also oftendiscriminated
against
agriculturaloutput and exportables,further promotingnet exports
problems. Hence, price liberalization
is seen as a way to remove
distortions,
increaseefficiencyand eliminatesectoraldiscrimination
in supply/demand
incentives. Associatedwith price liberalization
is
the raising of public sector prices and changes to cover costs and
reducethe fiscaldeficit.
As with almostall the measuresconsideredin this paper,price
liberalization
may have short-rundestabilizing
consequences.Foxley
(1981) notes that after prices have been frozen for a long period,
agentsare not sure how to set them again. Pricesmay overshoottheir
120 -
-
equilibrium
leveland if wages do not follow,declinesin the realwage
may cause decreases
in demand and in output.
If
many oligopolistic
elementsare present,as is often the case,it may take a long timefor
pricesto adjustdownwardto clearthe goodsand laborsarket. Whileit
is not clear that this scenariowill ever occur in full detail, It
serves to point out some potential short-run effects of price
liberalization
and suggestssome gradualism
In releasingcontrolsmay be
In order.
Both tradeand pricecontrolliberalization
reflectthe current
Interest in moving toward more market-oriented
economies. It is
believed
that
Inefficient
by
removing
administration
economic
activity
from the
of government and returning
clumsy
It to the control
of the marketplace,the elimination
of distortions
and rigidities
be more
readily
achieved.
and
will
Nevertheless,designersof structural
adjustmentprogramsmight want to considermore interventionist
tools,
especially
readily
as
second-best
be reduced.
solutions
Among these
when other
distortions
may be the use of export
cannot
subsidies
and/ormultipleexchangerates. Bird (1974)pointsout that thesemay
be useful
to take advantage
sectors.
For example,
exchange rate
import
demand is
contractionary
smaller
objective.
in exports
devaluation
plus
response
It may be considered
earnings
considered
expenditure
of different
desirable
more than that
highly
leakages.
an export
inelastic
Alternatively,
subsidy
elasticities
across
to devalue
the
on import payments, if
and
would
promote
a combination
would accomplish
of a
the same
-
121 -
While export subsidiesand multipleexchangeratesapparently
lack the destabilizingpotentialof policies returningactivity to
controlof the marketplace,theyare subjectto many of the traditional
criticismsof governmentregulation. They may entail fairly high
administration
costs, especiallysubsidies,and will be more or less
'helpful
them.
depending upon the quality
Moreover, while these tools
of the bureaucracies
administering
should be seen as temporary stop-gap
measures until
adjustZents
particular
tend to developvestedconstituencies
which will oppose
their
will
removal.
Finally,
would be the
in other
areas
while direct
most effective
are completed,
subsidies
subsidies
on value-added
means of promoting
exports,
in
exported
this
would
violate GATT rulings and invite hostile reciprocation.The popular
alternative,
credit
toward relatively
Another
subsidies
to exporters,
tends
to bias
investment
capital-intensive
techniques.
interventionist
structural
adjustment
program
to
supportexpenditure-switching
would be specifictargetingof investment
to the exportand import-substitution
sectors. This policy,to a large
degree,Implicitlyunderliesmuch of the public
investment
planning
in
Bank SALs. It derivesits rationale,first,from the fact that many of
are
the structuralrigiditiespreventingeasy expenditure-switching
caused by inadequate
focused
on these
infrastructure,
areas.
Secondly,
so that
the
public
poorly
investment
developed
must be
quality
of
developing country capital markets suggests that, even if the
appropriate
sectorsare made more profitable,
intervention
may be needed
to guide Investmentfinancingto them. Hence, in additionto specific
targettingof public investmentfunds, it may be desirableto give
- 122 -
credit and investment subsidies to exporting and import-substituting
sectors as well.
In his article on credit and adjustment,Keller (1980) argues
that in the absence of distortions, credit should flow toward the most
productive sectors, tradeable or home goods. This is because, first,
increases in output vis-a-vis absorptionwill always help net exports,
and secondly, because increases in home goods productionwould reduce
their price, increasing the demand for home goods and decreasing that
for substitutable tradeables.
His argument, however, is in general
premised upon the absence of distortions.
distortions which
prevent easy
It is precisely these
expenditure-switching,reduce the
importance of absorption per se and justify the use of second-best,
interventionistpolicies.
1.5
The Design of ConsistentStructuralAdjustmentPrograms
While it is apparent that there is much in the literatureon
the
design and
impact
of
specific stabilization and
structural
adjustmentpolicies,comparativelylittle has been written on the design
of comprehensive programs which integrate specific policies in a
consistent manner.
This section explores some of the issues
in
this
area, concentratingon the following in particular: the objectivesof a
structural adjustment program, its time frame and associated degree of
external financing,and the design of consistentsets of policies.
1.5.1
Objectivesof Adjustment
In general, it is possible to identify two broad alternative
objectives to adjustmentpolicies. The first of these is to correct the
- 123 -
balance of payments deficit of a country exclusively. The second is to
achieve external payments reduction with economic growth (or minimized
output
losses),
reduced
inflation, and
improved
microeconomic
performance. The main thrust of criticismof the stabilizationpolicies
historically pursued by the Fund is that they have concentrated
exclusively on the former objective with little regard for the latter
(Killick, Bird, Sharpley and Sutton 1984).
In response, it has been
argued that in the medium-term,there is no contradictionbetween shortterm externalpayments reductionand economicgrowth (Finch 1983, Nowzad
1984).
On the one hand, relativelyeasy expenditure-switching
and the
crucial need to constrain excess demand imply a short-term contraction
will lead readily to an early recovery.
On the other, delays in
external payments improvement are felt to only make matters more
difficult later on, so that BOP correctionsare prerequisitesto future
growth.
It should be noted that even a BOP correctionobjective admits
of a number of possible aggregates to be targeted. There appears to be
general agreement that the current account deficit alone is too narrow a
target if net capital inflows are sustainable,or at least not maturing
within any reasonable time horizon. An alternative possibility might
then be the basic balance (Killick et. al).
However, Crockett points
out that while the short-termdebt being accumulatedby many developing
nations is considered accommodatingand non-sustainable,this maturity
structure shift may actually reflect the way OPEC has chosen to recycle
its
structural
surpluses.
Referring
to
the
second,
broader
category
of
objectives,
a
number of attempts to define these goals more specifically have been
-
124
-
made, and they are all fairly compatible with each other.
The Bank
defines one of the main intents of its structuraladjustment loans as
being to
support a program of specific policy changes and institutional
reforms designed to achieve a more efficient use of resources and
thereby contribute to a more sustainablebalance of payments in the
medium and long-termand to the maintenanceof growth in the face of
severe constraints,and to lay the basis for regaining future growth
momentum."
Killick, Bird, Sharpley and Sutton (1984) define a very similar 'real
economy" approach to adjustmentwhose intent is to "create a viable BOP
in a manner which also promotes or at least minimizes conflicts with,
that group of government objectives called "economic development" (p.
272).
As with the Bank SALs, increasing the efficiency of resources
allocation is considered a key intermediategoal, while improvement of
the current account deficit and minimizingthe growth costs of this are
crucial
final
These
objectives.
objectives,
while perhaps appropriate, may
not be
specific enough to guide the design of structuraladjustment programs.
Williamson (1983) provides the following from broad targets, which
though not wholely explicit in themselves, suggest where further work
might be focused to refine the objectives:
1.
micro efficiency to ensure the economy is on the frontier of
its macro tradeoffs;
2.
reductionof high inflationand preventionof its acceleration;
3.
seek to avoid departure from internal balance, which is
country's
on
the
the
optimal point
deferred as
tradeoff;
inflation/unemployment
4.
achievementon average in the medium term, but not continuously
in the short-run, of external balance; this latter is defined
as the current account balancewhich is optimal,given domestic
savings,output,
and foreign savings opportunities.
- 125 -
1.5.2
ExternalFinancing and the Time Frame of Adjustment
The literature on stabilizationoften considers as independent
issues the appropriatelevel of external financing of the adjustmentand
the adjustment's time frame.
In fact, these issues are very much
related, for longer adjustment periods will entail longer periods of
current
than
account
shorter
deficit
term
and require
programs.
higher
levels
An appropriate
of external
structural
financing
adjustment
program design would analyse the costs and benefits of both external
financing and time horizon independently,and then weigh the two issues
jointly to determine the
financing
combination
of program length and
level.
There
relative
optimal
appears
appropriateness
to
be
substantial controversy regarding the
of "shock
treatments"and gradualistapproaches
to adjustment. In fact, the opposite sides of the debate do not so much
fundamentally disagree with each other as weight different factors
differently;in actuality, there appears to be a trade-off between the
economic.benefits of gradualism and the political benefits of shock
treatment.
Analysts of a structuralist orientation such as Killick
argue that gradualism is to be preferred,first because it allows fairly
rigid structural parameters time to adjust and secondly, it avoids the
welfare losses of harsh, rapid dislocation. An interesting simulation
study by Khan and Knight (1981) shows that attempts to achieve BOP
objectives in
a
one year
time frame require much more extreme
contractionaryrestraintand produce more marked fluctuationsin prices,
output,
Conversely,
and
unemployment than
Krueger
(1981)
would a
and
similar
five
others recommend a
year
program.
non-gradualist
-
126 -
approach because of the opportunitya gradualistapproachoffers for the
build-up of political resistanceto the program; this would particularly
be the case in the event of inevitable downturns or other problems in
the transitionaryperiod. A once-and-for-allimplementationof policies
seriously reduces the risk of political failure.
Moreover, Nowzad
(1984) points out that a series of shorter term programs may provide
greater flexibility over time than a single longer term program.
In
general, it is clear that both sides of the debate have merit, and the
appropriate trade-off must
basis.
be determined on a
country-by-country
In countries with strong political commitment to adjustment
policies, gradualismwill be most appropriate.
In terms of the optimal degree of external financing, there is
a general agreement in the literature that financing is not the
appropriate adjustment mode for persistent deficits, but does have a
role to play in easing the transition process.
argue
While some analysts
that international capital flows for adjustment should be
increased through internationalcooperation to allow longer adjustment
periods [Killick (1984), Dell (1983)], the SAL designer must take the
international credit environment as given.
Relatively little in the
literature focuses specifically upon optimal financing levels for
stabilization programs:
work-,,bySelowsky and Martin (1981) is a
conspicuous exception.
However, recent theoretical work
on the
determination of solvency and liquidity constraints for developing
economies may provide rough guidelines in this area [Sache (1983) and
Simenson (1984)].
- 127 -
1.5.3
The Design of Mutually ConsistentAdjustmentPolicies
As Section 1.4 showed, the stabilization literature abounds
with analyses of the impacts of particular stabilizationand structural
adjustmentpolicies. Very little research, however,has been devoted to
analyzing how a wide set of policies will interactwith each other, both
over time and in the long run.
Hence, few guidelines exist to help
design an adjustmentprogram pet se i.e., a set of consistent,mutually
reinforcingpolicies. The major example of an attempt to construct such
a general
Killick,
framework
Bird,
has
been
the
"real
economy"
approach
proposed
Sharpley and Sutton. As they point out in their
this approach is very similar in spirit to Bank SALs:
by
article,
the application
of a multiplicty of different policy tools to remove distortions,
enhance efficiency, promote resource mobilization,and correct payments
imbalance. As with most SAL-related documents, however, they do not
propose a formal framework which might be used to evaluate adjustment
programs and construct sets of optimal consistentpolicies.
Such an ideal framework would incorporate the elasticities of
response of policy objectives to policy actions, and would also account
for interaction effects between policies as well.
For example, the
literaturewarns that both devaluationand monetary restraint are likely
to be contractionary,but how contractionary? What will be the effect
of simultaneous application of both policies?
If answers to these
questions cannot be determined,it will necessarilylessen the faith one
would have in the final program.
first,
Answers to these questions depend
upon knowledge of the economy's response elasticities, and
secondly, upon a formal frameworkwhich integratesthese elasticitiesin
-
128 -
a consistent, simultaneous manner.
Furthermore, this framework must
recognize the distinction between impact and long run elasticities,so
that lags in the adjustment process are properly considered. As Cline
(1983) points out, the time path of optimal adjustment is a high
priority for future research. Otherwise, a dynamically
of policies will be hard to devise.
consistentset
Knight and Khan's effort at
modelling dynamic adjustment paths has already been noted, and their
work is a step in the right direction. Their approach, however, is
highly aggregate and incorporates very few policy instruments. A more
comprehensive framework for adjustment program design may be that
described by Lal (1984).
Ideally, the time path of the economy's
response to a multiplicity of different policy actions, especially at
the sectoral level, would be determined.
An implementation-oriented
adjustment
issue
in
the
design
of
structural
policies is the actual number of policy actions to be
undertaken. There is a fairly broad consensus across analysts that the
entire range of policy actions should be pursued - this is recommended
by writers as diverse as Killick and Finch. The reasons for this are
straightforward: the fewer the policies recommended,the farther each
individual policy must be pushed to achieve the same broad objectives.
This in turn leads to other undesirable distortions and imbalances.
Moreover, the elimination of widespread distortionsat the micro level
may simply not be achievable through manipulationof a few broad policy
tools.
Nevertheless,
too large
an adjustment
program "wish list"
places
burdens on the government's administrative capacity as well as the
ability of the Fund or the Bank to monitor the program or even negotiate
129 -
-
its acceptancein the first place. Hence, a trade-off exists of a type
similar to that between gradualismand once-and-for-alltime frames, and
its optimal point will vary from country to country.
Income DistributionEffects of AdjustmentPolicies
1.6
The role of distributional considerations in the design of
development
has
policies
rarely
been entirely
which
should not
agencies.
On
be
the
and this
ambiguity
Some analysts (Finch) contend
is true of adjustment policies as well.
that the income distribution is a
clear,
domestic, political consideration
interfered with
other hand,
by
there
external, international
is
growing belief
that
distributionalaspects may affect economic performance,and they will
certainly play a role in the domestic political support of adjustment
programs. While it is unclear how much weignt one mightwant to place
upon distributionalconsiderationsin a policy objective function, it
would
certainly
toward
inequality.
There
seem reasonable
is
to -attempt
currently no
stabilization programs
upon
to avoid
consensus on
income
extreme
the
net
distributions in
movements
impact of
developing
countries. This partly reflects our ignorance of the topic, and partly
the fact that diverse program combined with very different economies
will produce very different income distribution effects.
however,
general
agreement
that
far-reaching
have some substantial Impact. The following
adjustment
is a short
There is,
programs
may
summary of some
of the potential impacts of adjustmentpolicies noted in the literature.
Consideringjointly the many possible contractionaryeffects of
adjustment policy, it is unclear how the functionalincome distribution
- 130 -
will respond. As Ahluwaliaand Lysy (1981)pointout in theiranalysis,
the answer will depend partly on the elasticityof substitutionof
capital and labor, low elasticitieswill increaselabor's share as
outputdecreases. On the other hand, the key inequalityin developing
countriesmay not be between labor and capital so much as between
differentcategoriesof workers and capitalists.One may expect that
decreasesin demandwhich pushworkersout of the formalsectorand into
unemployment
or under-employment
in the informalsectorwould be likely
the size distribution
to increaseinequalityand poverty. (Technically,
could improve,by a variety of measures,while the number of people
undera givenabsolutepovertyline rose. In thesecases,some poverty
than a distribution
measure.)
criterionmightbe more appropriate
It is important to note that differentdemand restraint
measureswill cut differentlyacrosseconomicclasses. Foxley (1981)
points out that fiscal restraintinvolvingthe reductionof laborintensivepublicwork programswill hurt poor laborersthe most. On the
other hand, Omatunde and Salop (1980) note that credit restraint
tend
programs
rural
sector,
credit
access.
to discriminate
and other
Analysts
against
firms with
studying
the effects
small,
informal
long term credit
sector
firms,
the
needs or limited
of a devaluation
generallyfocus
upon its inflationary
potential.Taylor'smodelsassumethat increases
in prices combinewith a fixed nominal wage to drive the real wage
downward.
As already noted, however, the effect on the size
distribution
of
Omatunde
and
this
Salop
functional
point
inequality
rise
are
unclear;
if,
as
out, the lowered real wage increases
employment,positive benefits to welfare and income equality may
- 131 -
Moreover, they show that while successful devaluation may
result.
require a real wage decrease in the export sector (in terms of tradeable
goods' prices), nominal wages could still rise relative to the prices of
non-tradeables.
Depending upon intereectoral labor mobility and
labor/capitalsubstitutionelasticities,nominal wages could rise in the
non-tradeables sector as well.
A more long-term issue concerns the
relative labor-intensiveness of
the
tradeables and non-tradeables
sectors; the more labor-intensivethe export sector, the more marked the
beneficial real wage and employment effects will be from an effective
devaluation.
The effects of domestic resource mobilization upon income
inequality tend to depend upon the specific policies taken. According
to Omatunde and Salop, increased taxation is likely to fall heaviest
upon
importers,
exporters,
publiciformal sector
and
workers.
Conversely, many analysts note that widely recommended actions to cut
consumptionsubsidiesand raise governmentcharges (Finch)are likely to
fall most heavily upon the poor; Gwin (1983) points this out as an
important issue in the case of India's attempts to design an adjustment
program.
Attempt to mobilize private savings through raising the
interest rate will also have ambiguous effects.
Foxley argues that
increases in the interest rate discriminateagainst small firms, cause
bankruptcies (especially in conjunction with credit restraint) and
encourage the concentrationof "sets.
On the other hand, increases in
the lending rate should reduce incentive bia against labor utilization
and hence encourage
This
my
Increases
reduction
in employmnt
of the bias
over the long run.
toward capital-intensive
investment
be a key long term output of price, wage and tariff liberalizatlon
-
policies as well.
132 -
As already pointed out, one of the goals of tariff
reduction and rationalizationprogramswill be to equalize tariff rates
on capital goods vis-a-vis other imports and this should work to
increase the relative price of capital goods. The reform of industrial
wage and price administration can be tailored to work in the
direction.
However,
liberalization
as Foxley
policies
points
might
out,
the short-run
impact
sam
of tbes
be heightened disequilibrium,Increased
prices relativeto wages, and possibledecreases in output.
1.7
Global Consistency of AdjustmentPolicies
A
final
issue
adjustment
policies
programs.
Ensuring
First,
be
concerns
global
encouragement
associated
Traditional
with
the
the
global
consistency
design
consistency
must take
of particular
export
industries
sufficient
world
demand
with
analyses
connected
often
place
of
structural
of
adjuwtmut
on two lvewlc.
in a country
for
must
their output.
regard individual countries as price tekers
in world markets, (see Ahluwalia and Lysey for a notable exception)but
some countries will inevitably have substantial market shares In som
commodities.
as
Factors such
world
recession
and
Increasing
protectionismcould seriously limit a country's ability to expand
market share.
assessment
of
potential.
programs across
every
thongs,
Structural adjustment program design should Include am
those
Alternatively,
export
categories
where
expansion has
greatest
Secondly, the export policies of structural adjustmut
different
SAL, for example,
the
Its
world
countries
should
be mutually
to recommend the production
thong
market
widespreadreductions
would
in
and export
quickly
absorption
consistent.
be
across
Were
of rubber
saturated.
diffearat
-
countries
could
economies
exporting
therefore
be made
structural
seriously
adjustment
to
to
133 -
restrict
other
developing
coordinate
plans
the
with
export
potential
countries.
the
export
each
other.
(and
Efforts
import)
The global
of
those
should
sides
of
modelling
conducted in the Bank, and projections associated with the WDR, may
provide an appropriate,context for this approach. There is as yet
little literature on these issues, but as increasing nusbers of
countries undertake adjustment program
should attract researchinterest.
of one sort or another, it
- 134 -
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