The process of structural adjustment was first initiated in the industrialized countries and then "exported" to developing countries. It was the result in both groups of countries of a combination of conjunctural and secular forces. The former were represented by the economic crisis in the post-1973 period, first in the industrialized and then in the developing countries; the latter by the upsurge of world economic integration in the post-war period. This section looks first at the forces which propelled a reorientation of economic policies in the advanced countries before turning to an analysis of the dynamics of structural adjustment in the less developed regions of Africa, Latin America, South Asia and South-East and East Asia.
 

The years immediately after the first petrol shock in 1973 were characterized in most OECD countries by falling growth rates, rising unemployment, increasing inflation and declining investment and profit rates (see Table 1). This constituted a sharp reversal of the experience over the preceding two decades. For instance, annual output growth fell from 4.9 per cent over the period 196O-1973 to 2.7 per cent in 1974-1979. Inflation more than doubled from 4.1 to 9.7 per cent per annum over the two periods. Productivity growth declined from 3.8 to 1.6 per cent and investment expansion tumbled from 7.6 to 2.3 per cent per annum. The rate of unemployment rose from 3.1 to 5.1 per cent and the expansion in trade fell from 9.1 to 4.3 per cent.

(a) Real GNP; (b) Real gross private non-residential fixed investment; (c) Seven largest OECD countries (accounting for some 85 per cent of OECD GNP) only; (d) Average of merchandise imports and exports, in volume terms; (e) Real GNP per person employed; (f) Consumer price deflator;
Sources: J. Llewellyn and S.J. Potter (eds.) Economic Policies for the 1990s, Blackwell, Oxford, 1991. OECD, Historical Statistics 1960-1989, Paris, 1991.

This adverse performance generated wide-ranging enquiries into the state of the economy and analyses of previous policies. The result was a gradual emergence of a new consensus on the diagnosis of economic ills and a way out of stagflation.¹ The dominant view was that the economic problems of the 1970s were directly due to the past pursuit of policies of high aggregate demand, full employment, high rates of taxation, generous social welfare benefits and growing state intervention (OECD, 1987; Britton, 1991). It was argued that these policies had led to inflationary pressures through excessive wage demands, introduced rigidities in factor and product markets and thus blunted the incentives to save, work, invest and take risks. The first priority was to bring inflation under control. This was done with tight monetary policies and high interest rates. To restore economic growth in the medium term required more radical measures to promote market forces and curb the role of the state.

A somewhat different view on the crisis of the 1970s emphasizes changes in national and global political economy, such as the shift in the balance of power in favour of labour, the end of American hegemony and disorder in the international financial and trade systems (Marglin, 1988; Glyn et al., 1988; Kolko, 1988). While arguing that declines in productivity improvements and in profit shares had set in before 1973, these authors nevertheless concur with the neo-classical argument concerning the role played by full employment policies and union militancy in putting pressure on profit rates.

A more complete analysis of the slowdown in growth in the 1970s would no doubt include a discussion of the exhaustion of some other special factors in the early post-war decades such as reconstruction of infrastructure, farms and factories; the catching up in Japan and Europe with advanced technology and management techniques in America; the liberalization of trade and payments; creation of free trade areas; and the spurt of technological progress in products and services with mass demand (Britton, 1991).

While the crisis provided the immediate justification for the shift in policies, the deeper causes behind the upsurge of market forces and the retreat of the state must be sought in the increasing global integration facilitated by developments in the post-war period. These included the elimination of government controls on allocation of resources in the domestic economy, the progressive removal of restrictions on external trade and payments, expansion of foreign investment, loans and aid and rapid technological progress. It was above all the expansion of transnational enterprises (TNEs), facilitated by market liberalization and technological progress, that made a powerful contribution to internationalization of the world economy. At the same time, all these factors created strong pressures for and powerful vested interests in the continuance and intensification of free market policies.

The opportunity provided by a favourable combination of conjunctural and secular factors was seized upon by conservative forces to press their own agenda of balanced budget, reduction in progressive taxation, social security and welfare, and a diminished role of the state in economic management. The promise of tax reductions widened the constituency for reform. A combination of monetary, neo-classical and supply side theorists furnished the intellectual support for the position that the material prosperity of the industrial countries and the rapid economic progress of the East Asian countries was the result of their reliance on market forces. In contrast, they held, the poorer economic performance of the communist countries and much of the Third World resulted primarily from extensive state intervention in the management of the economy.
 

A combination of the conjunctural crisis and pressure from creditor countries and institutions was responsible for the shift in the policies of most developing countries towards structural adjustment. The contractionary policies pursued by the industrialized countries resulted in a sharp increase in world interest rates (thereby adding to the debt burden), massive deterioration in the commodity terms of trade and virtual cessation of private capital flows in the wake of the debt crisis and capital flight, thereby creating the conditions for a prolonged crisis in the majority of developing countries, especially in Latin America and Africa.

For instance, short-term real interest rates in the United States rose from an annual average of -0.7 per cent in 1972-1975 to 5.0 per cent in 1980-1982 (OECD, 1983). The index of the terms of trade of non-petroleum exporting developing countries fell from 110 in 1973-1975 (1980=100) to 94 in 1981-1983 and further to 84 in 1989-1990 (UNCTAD, 1990). The net flows of private capital declined from over US$ 70 billion in 1979-1981 to barely US$ 28 billion in 1985-1986, while capital flight from 13 highly indebted countries rose from US$ 47 billion at the end of 1978 to US$ 184 billion at the end of 1988 (OECD, 1991; Rojas-Suárez, 1991).

In sub-Saharan Africa excluding Nigeria, the net deterioration in the external financial situation from these three factors amounted to US$ 6.5 billion per annum over the period 1979-1981 to 1985-1987. These amounts, which take into account debt rescheduling but ignore capital flight, attained roughly one third of the total annual imports of goods and services of these countries in the early 1980s and about 45 per cent of average annual export earnings (United Nations, 1988). In Latin America, the net external resources turned around from an inflow of US$ 15.8 billion in 1978-1979 to an outflow of US$ 22.8 billion in 1987-1988, equivalent to 22.5 and 20.5 per cent of exports of goods and services in the two periods (Ghai and Hewitt de Alcántara, 1991).

While the emergence of the acute crisis in the late 1970s and early 1980s provided the immediate justification for the adoption of adjustment policies, some major weaknesses in development policies constituted structural barriers to efficiency and sustained rapid growth. These included excessive taxation of agriculture, indiscriminate protection of industry, overvalued exchange rates, extensive state intervention in resource allocation by administrative means, inefficiencies in state enterprises and widespread corruption and mismanagement (World Bank, 1981; Griffith-Jones and Sunkel, 1986). The overwhelming importance of the external environment is, however, indicated by the fact that these weaknesses in economic policy and management did not prevent most of these countries from achieving substantial rates of economic expansion in the preceding two to three decades.

The favourable growth experience of many Asian countries during the 1980s does not constitute a rebuttal of the above argument. Several of these countries continued to follow the type of policies described above. Their relatively favourable performance in an adverse international economic environment would appear to be due at least in some measure to special features of their economies and their relationship with the world economy. For instance, some of the large countries such as Bangladesh, China, India and Pakistan are much less dependent on world trade than most Latin American and African countries.² The weight of manufactures in the exports of Asian countries is much greater than in African and Latin American countries. Manufactured goods as a percentage of South and East Asian exports were already 44 per cent in 1970, compared to 4 per cent in West Asia, 7 per cent in Africa and 11 per cent in Latin America. By 1988, manufactured goods comprised 76 per cent of South and East Asian exports, compared with 16, 16 and 34 per cent in West Asia, Africa and Latin America, respectively (UNCTAD, 1990).

Three other factors must be mentioned. The debt burden in the early 1980s was considerably greater in Latin America and Africa than in Asia: in 1983, the debt service ratios in the three regions were 25, 37 and 18 respectively (OECD, 1991). Asian countries also benefited disproportionately from remittances from their migrants in the booming Middle Eastern oil-exporting countries in the 1970s and early 1980s. In 1975, 1.6 million migrants were employed in these countries, of which over 20 per cent came from South and South-East Asia. The number increased to 3 million by 1980, 25 per cent of which were from South and South-East Asia, the majority of the remaining coming from the neighbouring Arab countries (Burki, 1984; Talal, 1984). Workers' remittances accounted for more than 28 per cent of the exports of goods and non-factor services in Pakistan in 1975 and 80 per cent in 1982. For India the remittances increased from 5 per cent of exports in 1972 to 25 in 1982. The corresponding figures for Sri Lanka are 1.4 per cent in 1974 and 22 in 1982 and for Thailand 1 per cent in 1976 to over 10 per cent in 1983 (World Bank, 1990).

Proximity to the most dynamic industrialized economy in the world greatly boosted the economies of neighbouring countries in East and South-East Asia. Indonesia, Malaysia, the Philippines, South Korea and Thailand have exported significant shares of their exports to Japan since at least 1970: South Korea 28 per cent in 1970; Malaysia 24 per cent in 1985; and Indonesia 49 per cent in 1980. However, some of these shares declined in subsequent years (UNCTAD, 1990). Japan has also greatly increased its investment in South-East Asia. For instance, between 1980 and 1987, the annual flow of Japanese foreign direct investment increased fivefold in Thailand, fourfold in Singapore and almost sixfold in Taiwan, Province of China (Lim and Fong, 1991).

It would be pointless to deny the importance of national policies in adapting to the changing world conditions. Countries in South-East Asia have put in place a number of policies to attract foreign investment. And East Asian and more recently the South-East Asian countries have given export promotion a high priority. But these policies have often involved active state intervention in a number of areas.

The preceding discussion brings out some contrasts in the origins of and underlying forces in the adoption of structural adjustment policies in different regions of the developing world. As in the industrialized countries, the crisis triggered off changes in economic policy in African and Latin American countries. The weaknesses in previous policies and economic management intensified the need for adjustment. But whereas in the industrialized countries, it was the dynamics of the globalization process which tipped the balance in favour of adjustment policies through the interplay of contending social groups, in African and Latin American countries, it was the pressure exerted by creditor countries, commercial banks, international financial agencies and TNEs which proved the decisive element. This was especially the case in Africa where there was practically no organized lobby for deregulation and liberalization. It was less true in some Latin American countries where free market policies had been associated with military and conservative régimes and were also espoused by some technocrats and large businesses in mining, agriculture, manufactured exports, finance and trade.

In Asia, experiences have been more diverse. While some of the countries in the region such as Taiwan, Province of China, and South Korea were among the first to adopt some elements of reform, especially those relating to trade, foreign exchange liberalization and promotion of manufactured exports, others such as India and Pakistan were converted to the cause only in the 1990s. Most of the South-East Asian countries began to introduce reform measures in the 1980s (Lim and Fong, 1991).

Similar diversity characterized the underlying forces behind the drive for liberalization. The economic crisis and foreign pressure played some part in India and Pakistan but there was also an increasingly powerful domestic lobby, constituted by big business and the bureaucratic and technological élite, which felt that liberalization of the domestic and foreign economy was essential for the modernization and rapid growth of the economy. The reforms in the South-East Asian countries were greatly influenced by the experience of the four tigers and had much less to do with economic crisis or pressure from creditors.

1 An OECD publication, Structural Adjustment and Economic Performance (OECD, 1987), contains a good discussion of the rationale as well as the contents of the emerging consensus on economic policy.

2 Singh has argued that China and India outperformed Brazil and Mexico after the second oil crisis, not because they had more open and export-oriented trading régimes and followed appropriate exchange rate policies, but because they were less integrated in the world economy (Singh, 1985).

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