26 September 2012

Day 106: Structural Adjustment

Next we will be looking at some of the main conditions that are called for by the World Bank and IMF, These conditions have been placed in order to ‘assist’ the borrowing country in economic growth so that it will be able to pay off its debts. In many cases though, the actual results from structural adjustment report that the borrowing country is worse off after having accepted a loan from the IMF/World Bank – while the rich countries are reap the benefits.

Government Reduction

The main reason the IMF and World Bank think that a country is unable to pay its foreign debt, is the assumption that the Free Market is being obstructed by government activity. Their rationale is that if the government gets downsized, markets will function more effectively, which in turn will stimulate economic growth.

In the case of government reduction policies the government requires to abandon certain functions so that the private sector can take these functions over and optimize them. In the areas or functions that the government still retains (because it is either impossible for the private sector to do it better or those functions that are hard to impossible to capitalise from but are a necessity for society) – cutbacks in spending and staff are demanded.

In most countries (both rich and poor), the government is the largest employer. In poor countries where a strong private sector has not yet been developed, the government is most often the dominant force in the country’s economy. Sudden and extensive cuts in government spending can leave hundreds of thousands of people jobless and contribute to a massive surge in unemployment. In addition to that, because the private sector is not as developed as in other countries, frequently the functions and services the government stopped providing, do not get continued by the private sector – because there is simply no-one to take it over!


Government reduction goes hand in hand with privatization plans. Governments agree to lay off thousands of workers to prepare the way for corporations to privatize.
This however does not leave the private sector untouched by the IMF and World Bank. Privatization is often also affected by downsizing, as well as private employer assaults on unions and demands for wage reduction.

Labour Flexibility

IMF and World Bank often demand higher labour flexibility. This concept refers to the transformation of labour to a mere commodity. This policy promotes and enables companies to hire and fire workers, and change the terms and conditions of work with only minimal regulatory restriction.

The IMF/World Bank reason that if labour is treated like a commodity, the free market system will function more efficiently and effectively, which in turn will stimulate economic growth.

The theory however does not match up with reality. Joseph Stiglitz, former World Bank chief economist shared with ‘Multinational Monitor’: “The evidence in Latin America is not supportive of those conclusions. Wage flexibility has not been associated with lower unemployment. Nor has there been more job creation in general.” Where “labor market flexibility was designed to move people from low productivity jobs to high productivity jobs, too often it moved people from low productivity jobs to unemployment, which is even lower productivity.”

Wage Decompression

Wage decompression refers to the increasing of the ratio of highest to lowest paid worker. This concept is most commonly applied within the public sector where the government has the authority to regulate wages, and is done in order to “reduce government expenditure”. However, this concept is not applied to managers where the belief is held that higher pay is needed to attract high quality employees and to provide an incentive for hard work.

Sometimes the World Bank and IMF also apply wage freezes, wage cuts and wage rollbacks in the private sector (where the minimum wage is frozen or reduced). These various policies of wage adjustment are often referred to “wage flexibility”.

Pension Reforms

Pension reforms come down to the implementation of lower benefits, provided at a later age – along with the privatization of social security

Enhanced by Zemanta


Post a Comment