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Structural Adjustment: Time for Reform/ Third World Countries Strangled by Debt

In December President Clinton and the United States government promised 80 million dollars in disaster assistance to the countries of Honduras and Nicaragua, which have suffered such devastation from Hurricane Mitch.

Unfortunately, this aid will have little impact given that Honduras and Nicaragua must pay over 80 million dollars every five weeks to service their debt. (Jubilee 2000/USA Action Alert 11/12/98). And they are not alone.

More than 40 other developing (e.g. “Third World”) countries owe billions of dollars to the United States, Europe and other foreign financiers on loans that they took out more than two decades ago. What’s worse, in order to reschedule their payments, the vast majority of these nations have been coerced into participating in Structural Adjustment Programs (SAP’s), negotiated through the World Bank and/or the International Monetary Fund (IMF).

Though originally intended to stimulate growth and provide much needed development aid, structural adjustment programs, which typically include harsh austerity plans, are doing more harm than good in most of the regions where they have been implemented.

In fact, the human damage has been so great that Pope John Paul II has called for an end to these programs by urging that Third World debts be forgiven in the Jubilee year.

In structural adjustment programs the focus in on debt reduction. Priority is given to exporting the products that bring in the most cash, even if it includes paying slave wages, using environmentally destructive methods of production, or exporting the best and most nutritious food.

Editors’ Note: The editors of the HCW witnessed this at a banana processing plant in Guatemala. Mammoth semi trucks headed for the United States were loaded with the best bananas. The rejects were put on a small dump truck heading for local consumption.

A man who recently arrived at Casa Juan Diego from Honduras saw a box of bananas in the dining room and picked one up. He stood looking at it and exclaimed: This is a miracle! A miracle banana! I have never seen a banana like this!

Bad Loans-Whose fault?

Before any serious critique of SAP’s can be attempted, however, it is essential to explain just how they came about and to ask, Why are so many Third World nations behind on their debt payments? And why do the World Bank and IMF exercise so much influence over their economies?

Many people assert that the majority of the Third World’s debt was brought upon itself by the failure of import substitution and/or the gross mismanagement of funds by corrupt government officials. While these claims are not necessarily invalid, the so-called “Third World” debt crisis actually has its roots in the larger and inherently unequal international economic system. In fact, the underpinnings of the current financial disaster can be traced back to the end of the Second World War, when the United States found itself in a position of great surplus relative to the rest of the globe. Not wanting to sacrifice the high levels of output it had achieved during wartime, the U.S. (through commercial banks) began to administer loans to developing countries in Africa, Latin America, and Asia so that they could keep purchasing American goods.

This North-South pattern of capital flow continued to gather momentum through the 1970’s, when unprecedented increases in oil prices on the part of the nascent OPEC created massive profits for its members, who, in turn, inundated Northern banks with deposits. To properly recycle these “petrodollars”, many of these banks greatly augmented their loans to the developing world, resulting in a virtual “lending frenzy.” (David Simon, et al., eds.Structurally Adjusted Africa: Poverty Debt and Basic Needs. London: Pluto Press, 1995, p.62).

Consequently, Third World debt burdens began to mount during the last half of the decade, and continued to do so into the early 80’s, in the face of rising interest rates and global recession. Indeed, by 1982, many debtor countries were rapidly approaching the point of default, or that at which their accumulated debt service would overtake their annual income from foreign aid, portending financial ruin for the Northern banks.

In a desperate attempt to delay this burgeoning global debt crisis, the World Bank and the International Monetary Fund stepped in, offering to effectively bail out the commercial banks. It was in this context that the concept of Structural Adjustment Lending first came into the limelight. Essentially, the World Bank and the IMF offered to provide debtor countries with the necessary loans to enable them to continue servicing their debt, provided that they “adjust” their economies according to specific policy requirements. These requirements soon came to be embodied in country-specific Structural Adjustment Programs (SAP’s) and were reflective of a concomitant neoliberal revolution in economic thought (called neoconservatism in the United States). Thus, in negotiating SAP’s, the IMF and/or the Bank typically dictated (and continue to dictate) a number of supply-side and trade liberalization measures, such as privatization, currency devaluation, price decontrol, export incentives, decreased government spending, and exchange rate flexibility.

These prescriptions were especially demanding on nations in Africa and Latin America, which, until this point, had maintained largely state-led economies. Yet, faced with overwhelming debt and shrinking national income, they had little choice but to subscribe to the Northern, free-market rationale, making SAP’s virtually synonymous with economic policy in the Third World today.

Debt, Not Growth

Though the World Bank and the IMF argue that adjustment is proceeding according to plans, allowing countries to “…reduce their current account deficits to more manageable proportions in the medium-term while maintaining the maximum feasible development effort” (Simon, p. 3), the statistics paint a strikingly different picture.

To begin, there has been little, if any, consistent growth in nations presently undergoing SAP’s. While some, such as Ghana, have experienced relatively stable rates of positive GDP growth, most have witnessed sporadic rises and falls. Moreover, there appears to be little correlation between the degree to which a nation has implemented its SAP and its overall economic performance. For example, in his article, “Structural Adjustment in Africa: A Failing Grade So Far,” Sayre P. Schatz points out that the African countries who have most ardently complied with the Bank and the Fund’s “free-trade” mandates are not necessarily those who have achieved the highest GDP’s. On the contrary, the four countries with the worst reform records (Gabon, Kenya, Madagascar and Malawi) actually performed above average. (Journal of Modern African Studies 23:4 1994, p. 683.) Also, in his recent book One World: Ready or Not: the Manic Logic of Global Capitalism, William Greider notes that, “…the poorer nations who have succeeded most spectacularly during the last three decades are ones that exercised stringent controls over capital.” (New York: Simon & Schuster, 1997, p.264.)

Even where genuine growth has occurred, it has done little to promote real economic expansion (i.e. savings and investment), since nearly all debtor countries have actually accrued grater debt burdens under structural adjustment. Some nations, such as Nicaragua, have seen their debt double or even triple in the past decade. (Jubilee 2000/USA, Action Alert, November 12, 1998)

Others, such as Uganda and Tanzania, now possess debt to export ratios of over 300%, meaning that their total debt burden is three hundred times that of their net annual export earnings, although, according to a number of critics, any ratio above 200 is unsustainable. Worse still, in order to bring these ratios down to sustainable levels, any given debtor country would need to maintain a GDP growth rate of over 15% per annum, something that few, if any, have come close to approaching. (From notes, taken by the author in Summer 1996 while interning at the Center of Concern. Washington, D.C.) Thus, the Third World is caught in a classic “Catch-22” scenario: either it must continue to depend upon foreign aid and structural adjustment or fall deeper into economic misery.

Poverty, Not Relief

Aside from their questionable impact on growth and debt burdens, SAP’s have done little to alleviate poverty across the Third World. Rather, in most countries, they have intrinsically favored the “comprador” class, comprised of professionals, businessmen, technocrats, and other Northern-educated elites, while virtually ignoring the poor. In many areas, competition for resources has actually become more intense, as corporations and private industries, who are given free reign of the land under the “invisible hand” ideology of adjustment, have crowded out the public sector and many small, locally-owned businesses.

In addition, neoliberal attempts to “flexibilize” labor– cracking down on trade unions and giving managers more control over employees’ hours– in a number of debtor countries have seriously depressed earnings among lower-income groups. In Chile alone, more than 23 percent of wage-earners in the manufacturing sector were living below the poverty line by the early 1990’s, whereas before the debt crisis “…a job in a factory virtually guaranteed a pay packet big enough to keep a family out of poverty.” (Duncan Green. Silent Revolution: The Rise of Market Economics in Latin America. London: Cassell, 1995, p. 96) These declines in wages, coupled with higher prices, are prohibiting many poor individuals from attaining even the most basic of human needs, such as potable drinking water, food, and adequate shelter.

Of even further detriment to the lower classes are the drastic cuts in social services that typically accompany adjustment. Many governments have been forced to decrease spending in areas such as health care and education in order to comply with SAP-imposed budgetary restraints. Although proponents of adjustment assert that these cuts are irrelevant because of subsequent increases in private sector alternatives, they fail to consider the specific needs of the poor. While private providers may indeed offer higher quality education and medical care, they often require exorbitant fees, which the poor simply cannot pay. Also, many public institutions have now been induced to charge user fees to make up for lost funding, further alienating the most needy clientele. This phenomenon of “institutionalized exclusion” was dramatically illustrated in Zimbabwe, when, as educational fees were recently increased, primary school enrollments among the lowest income quintile decreased by almost 20%. (Simon, p. 84)

Environmental Destruction,Not Development

Finally, in order to respond to their demands for increased exports, many Third World countries undergoing SAP’s have been encouraged, or even forced, to divert resources away from small-scale, domestic food production into giant commercial farms, most of which are owned by US-based multinational corporations. Not only do these “agrobusinesses” (and the capital-intensive agricultural practices they promote) threaten food security, they do little, if anything, to promote economic diversification. Instead, by placing the unbridled exploitation of the land above human capacitation, they merely serve to “enhance structural rigidities…and lock countries into unsustainable and environmentally destructive patterns of resource use.” (Kidane Mengisteab and B. Ikubolajeh Logan, eds.Beyond Economic Liberalization in Africa: Structural Adjustment and the Alternatives.London: Zed Books, Ltd., 1996, p.146)

Nowhere in the world have these trends more apparent than in the tropical rainforests. In Costa Rica alone, more than 2.5 tons of topsoil is being lost for every kilogram of beef it exports to the U.S. fast food industry (Green, 109). Similarly, the soybean agribusiness boom in Southern Brazil, a direct consequence of World Bank export pressures, has displaced large numbers of peasant farmers from their land, impelling them to “…head for the ‘agricultural frontier’ of the Amazon in search of farmland, cutting down forest in slash and burn agriculture.” (Green, 109)

What can be done?

With just one year left until the Jubilee of the Year 2000, many are asking, “What can be done? How can we lift the burdens of debt and adjustment off the shoulders of our Southern neighbors?”

The most effective and immediate solution, of course, would be to cancel, or “forgive” the Third World’s debt in its entirety. This is the position taken by Pope John Paul II, who has, as mentioned earlier taken the prophetic stance of calling for debt forgiveness for the Jubilee. The Holy Father has also highlighted in his recent World Day of Peace message (January 1, 1999) that “certain economic problems,” which are discussed only in “limited circles” have led to the inappropriate concentration of political and financial power in small numbers of governments or interest groups. According to the National Catholic Register, The Vatican information service FIDES explained this statement of the Pope in reference to such institutions and events as the G8 groups (the wealthy nations who meet to plan economic life for the world), the World Bank’s development policies, and the IMF’s mistakes in policy regarding the Asian crisis.

Others are advocating a more gradual approach. They believe that structural adjustment need not be eliminated completely, but that social and environmental impact assessments must be conducted by independent and/or non-profit organizations prior to the implementation of SAP’s, to make them more sensitive to local problems and the special situation of the poor. Still others are calling attention to the need for greater popular participation in adjustment planning. By this they mean that debtor countries and their people should be given more control and leeway in designing their adjustment programs.

Of course, no reforms will ever come to fruition if the leaders of the World Bank and the IMF aren’t convinced of their necessity. What is required, therefore, is a comprehensive effort on the part of everyone: political leaders, economists and common citizens alike, to let these institutions know that they must find more socially sensitive and environmentally sustainable ways to exact their debt payments.

Houston Catholic Worker, Vol. XIX, No. 1, January-February 1999.