In a complex world economy, adjustment is inevitable. The normal
process of competition is periodically marked by crises which disrupt national economies,
create severe balance-of-payments problems and threaten to exclude many people from
international markets. Whether these crises stem fundamentally from unwise interference in
the market or, on the contrary, from lack of adequate regulation is one of the central
debates in economic policy-making.
Although technical expertise (based upon underlying
theoretical assumptions) is an important element in designing a response to crises,
adjustment is above all a political process. The content of policy reform is shaped by the
ability of different groups within adjusting countries to promote and defend their own
interests; by the bargaining power of specific deficit countries in the international
economic and political arena; and by the internal political agenda of creditor countries
during the period when programmes of economic stabilization and assistance are being
These elements in the political equation of adjustment
have changed considerably over the past 50 years; and, in consequence, the content of
adjustment programmes has also undergone modification. While stabilization programmes
until the 1970s which restored monetary and fiscal order, and preserved the
capacity to import were not usually followed by attempts to restructure the
economy, adjustment in the 1980s and early 1990s was associated with intense pressure to
abandon inward-oriented national projects of economic development and to stake the future
of people in the developing world on increasingly unprotected participation in the
After briefly reviewing factors which contributed to the
rise of the radical free-market form of adjustment, the paper considers some of the
lessons which can be learned from experiences with economic reform during the 1980s. The
most basic of these is simply that the power to impose solutions, conferred upon creditors
through the mechanism of conditionality, can be counter-productive. Reform policies
designed in the abstract and applied with little understanding of local realities, often
prove unsuited to solving concrete problems in stubbornly idiosyncratic national settings.
The majority of the adjustment experiences now considered
relatively "successful" and they are a small number in relation to the
total group of countries engaged in reform programmes have restored economic order
through tempering free-market orthodoxy with regulation of key prices. Defending exchange
rates from sharp fluctuations, imposing price controls on a few strategic goods and
services, fixing interest rates within certain limits and maintaining wage stability have
required a strong state, not a weak one. "Success" has also depended upon
obtaining access to large reserves of foreign exchange (whether through state-owned export
industries, foreign aid, renewed lines of international credit, or even in some
cases from the drug trade).
"Successfully" adjusting countries depend for
renewed growth on large flows of foreign private investment. Their real accomplishments
are therefore threatened by the extraordinary volatility of these capital markets as well
as by exposure through indebtedness to the dangers of rising interest rates in the
industrialized world. In this sense, it is safe to say that for "successful"
adjusters, as for a much larger number of indebted nations which are still mired in deep
recession, the debt crisis is far from over.
The social cost of continued recession and restructuring
in many Third World countries is high. During the early 1990s, per capita income in most
African and Latin American nations was lower than in 1980; and the average income of the
poorest strata was much lower. Minimum wages stood at half or less than half their former
value. Unemployment in the formal sector was often much higher than at the outset of the
debt crisis, although in relatively more successful cases this problem had been resolved
in part by generating a great many new jobs which are badly paid and insecure.
During the latter 1980s, governments and international
financial institutions began to review the adjustment experience. Under pressure from
angry citizens of Third World countries as well as from concerned citizens' groups in the
North, economic reform programmes began to take social welfare considerations more
explicitly into account. And, in response to obvious problems of reform implementation,
attention was increasingly focused on such institutional issues as the need to improve
efficiency, transparency and accountability in Third World government; the importance of
restructuring and upgrading public bureaucracies; and the urgency of strengthening local
level institutions through decentralization and promotion of citizens' organizations.
Nevertheless this incorporation of institutional issues in
the adjustment model is still fragmentary and does not systematically explore the links
between economic, political and social reform. This situation must be remedied. In fact,
it is vitally important to consider how patterns of social change under conditions of
continuing economic crisis and restructuring are affecting the capacity of societies to
provide a minimal framework of stability and justice, within which people can interact
Local level research suggests that the coping strategies
adopted by many different kinds of people, as they confront severe challenges to their
livelihood, weaken modern institutions and make good governance more problematic.
Diversification of income strategies affects the quality of work and the commitment of
employees to the institutions they serve. Growing fragmentation of loyalties weakens
unions and other forms of interest association which are in fact essential instruments of
dialogue between government and the public. This kind of problem stands behind many of the
failed efforts to forge pacts in support of stabilization programmes.
Furthermore the erosion of a structure of modern interest
groups in many indebted Third World countries affects the strength of political parties
and thus the capacity of political systems to create stable governing coalitions. Violent
and unorganized protest is likely to take the place of more formal bargaining procedures
in such situations.
Finally, the pronounced widening of income differentials
within many countries over the past few decades has played a significant role in weakening
broader networks of social interaction and solidarity. There is often a marked cultural
dimension to this process of polarization. As they are integrated further into
international markets, some people become part of global consumer culture; while others
are left to reinforce more traditional ties of identity and support.
Clearly, the particular form of adjustment in vogue for
the past 15 years has not created the necessary conditions for most people in indebted
Third World countries to have a better future. The paper therefore closes with a plea for
wide ranging consideration of new approaches to adjustment and restructuring. Among other
things, this debate should take a systemic view of adjustment, assuming that dealing with
imbalances in world trade and finance is as much a problem for creditor as for debtor
countries. And it should recognize the fact that improving the reform process is as
important as improving its policy content. Since there is no single prescription which can
be relied upon to solve the complex problems of economic recovery, specific approaches
must be worked out through adequate consultation at the national level. In this respect,
conditionality should be used with caution: it can pre-empt dialogue and permit imposition
of policies which are either technically inadequate, given local conditions, or
politically unfeasible, or both.