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CHALLENGES AND OPPORTUNITIES FOR STRUCTURAL ADJUSTMENT DURING AN ECONOMIC CRISIS: THE CASE OF ZAMBIA AND MALAWI Taylor Chatfield, Texas Christian University t.q.chatfield@tcu.edu Allison Bailiff, Texas Christian University Allison.bailiff@tcu.edu ABSTRACT Since World War II, the IMF and World Bank have provided funds to countries in economic need, that have come to be know as structural adjustment policies (SAP). Structural adjustment policies aim to help countries adjust the structure of their economy. However, the adjustments of these policies are based on the United States’ free market economy, an economic plan that does not translate well in to every country in need. So, although the programs strive to strengthen the borrowing countries economies, oftentimes problems that have consequences further reaching than the economy arise. This chapter examines the effect of SAP on two countries: Zambia and Malawi. THE WORLD BANK AND INTERNATIONAL MONETARY FUND The World Bank and International Monetary Fund were first conceived during World War II as organizations that would aid in the reconstruction of Europe following the war. Over the years reconstruction has been their main focus, but as their funds have grown so has their ability to lend aid during humanitarian crises, natural disasters as well as rehabilitation of developing countries. Over the years their focus has shifted from reconstruction to poverty reduction with the creation of the World Bank’s International Development Association in 1960 (“IMF History,” 2006). Since the second world war, the IMF and World Bank have provided funds to countries in economic need, that have come to be know as structural adjustment policies. Structural adjustment policies aim to help countries adjust the structure of their economy. However, the adjustments of these policies are based on the United States’ free market economy, an economic plan that does not translate well in to every country in need. So, although the programs strive to strengthen the borrowing countries economies, often times problems that have consequences further reaching than the economy arise. With the current economic crisis multiple developed countries are in need of financial aid. Iceland, for example, was severely affected by the economic downturn. In 2008, the IMF approved over $3 billion to be disbursed through 2011 (Valdimarsson, 2009). To predict the future implications of IMF loans an evaluation of the challenges and benefits of historical data are reviewed. A history or structural adjustment policies as well as case studies on Zambia and Malawi will be utilized to evaluate the past, present and future success of structural adjustment policies and to determine the appropriate measures to be taken when giving monetary aid in the wake of the current economic crisis. ENHANCED STRUCTURAL ADJUSTMENT FACILITY (1986-1999) Founded in March of 1986, the Structural Adjustment Facility (SAF) was the International Monetary Fund and World Bank’s first cooperative effort to design a


process specifically for loaning money to low-income, developing countries. As with most new programs, changes were made to eligibility requirements and loan policies of the SAF and in December of 1987, the program was renamed Enhanced Structural Adjustment Facility (ESAF). Under ESAF, 80 impoverished nations were eligible for low-interest loans, which could total up to 140 percent of their IMF quota or up to 185 percent under special circumstances (“IMF history,” 2006). An IMF quota is a specific numerical value that is assigned to each country upon their entrance in to the International Monetary Fund. The value is determined by using a formula that evaluates a country’s GDP, openness, economic variability and international reserves. Currently the USA has the highest IMF quota of 37.1 billion, while Zambia, a country eligible for ESAF loans, has a quota of 489.1 million. ESAF loans are arranged on a three-year basis and accumulate .5 percent interest. Repayment begins five years after disbursement ends and lasts for 10 years (“IMF history,” 2006). SAF and ESAF loans were prepared by country officials as well as IMF and World Bank staff, broader consultation from other countries, or local authorities from the country in question did not take part in creating the framework papers. These papers, which did not change between the SAF and the ESAF, laid out economic, social and political obligations that the given country agreed to in accepting the loan. They also explicitly detailed in what ways the money from the loan should be spent to maximize economic stability (“The IMF’s enhanced,” 1999). The framework papers were based on the idea of free market capitalism whether that was the best prescription for the country’s problems or not (“IMF history,” 2006). The main goal of ESAF loans was economic stabilization, with poverty reduction considered an “implicit by product” of the programs (“IMF lending,” 2001). THE CASE OF ZAMBIA Zambia’s case will be used to analyze the challenges associated with SAF and ESAF loans and the specific limits and requirements of framework papers. Zambia a country of just under 12 million people lies in Sub-Saharan Africa. The majority of the workforce (85 percent) works in agriculture. Its adult prevalence of HIV/AIDS is the seventh highest in the world and infant mortality rate is ninth highest (“Zambia,” 2009). Zambia won its independence from Great Britain in 1964 after a boom in mining led to an increase in immigration. However, in the 1980s and 1990s, an extended drought and decline in copper prices damaged the economy severely. By the elections of 1991, when a new party took office, the per capita GDP was down by one-third since the 1970s (“Zambia,” 2009). This severe economic downturn and the “accumulation of overdue financial obligations to the IMF” caused Zambia to be ineligible to use IMF resources (“Zambia enhanced structural,” 1999). Between 1991 and 1995, the government established an Economic Recovery Program that aimed to reverse negative economic effects of the past 30 years, free markets and remove government control (“Zambia enhanced structural,” 1999). On December 6, 1995, the IMF approved a one-year SAF and a three-year ESAF loan for Zambia. Requirements of the loans were laid out in framework papers, which, among other things, required the government to deregulate prices on consumer goods to strengthen local markets, reduce non-military public employment, increase agricultural output to augment the country’s exports, work to privatize all public utilities and reduce spending on social services (“Zambia


enhanced structural,” 1999). In following these requirements, the IMF believed that economic stability in Zambia would be achieved and, in turn, would lead to poverty reduction. This plan, however, did not strengthen the economy or decrease poverty in Zambia. The plans laid out for Zambia in the framework papers not only failed to meet the goal of economic stabilization, in many cases they created a more difficult situation for citizens of Zambia. By deregulating prices on consumer goods, prices on basic necessities, including food increased so much that many people were no longer able to buy enough food for their family, causing widespread malnutrition. In 1996, up to 57 percent of children under five years old were considered malnourished. The most common form of malnourishment was Protein Energy Malnourishment, which is most closely identified with inadequate food intake (Saasa, 2002). Increase in agricultural output for export only worsened the situation for Zambian families because an increase in agricultural output meant a decrease in domestic food production. To help lessen the problem of malnourishment, many agencies and foreign governments sent food supplies to the Zambian government; however, a clause in the framework papers stated “the government [of Zambia] also intends to sell on a competitive basis the agricultural inputs it receives in the form of external aid” (“Zambia enhanced structural,” 1999). Even the food given as aid to the people of Zambia was unattainable because of high prices. Another effect of increased agricultural output was environmental degradation caused by government provided and mandated high-efficiency fertilizers that stripped the land of its nutrients and contaminated water supplies (Jere-Mwiindilila, 1994). The privatization of utilities, including electricity also increased prices to Zambian people, which meant that many Zambians were no longer able access to electricity because of the high prices. Utility companies were auctioned off to many multinational companies that had no obligation to reinvest the money they accumulated in Zambia (JereMwiindilila, 1994). The framework papers also required the Zambian government to reduce non-military public employment. This meant that many people who were employed by the government lost their jobs at a time when prices were increasing in nearly every sector of their daily expenditures. The main problem with the implementation of SAF and ESAF loans in Zambia was their lack of consideration for the citizens of Zambia. In Zambian author Priscilla Jere-Mwiindilila’s words SAF and ESAF loans “have to take on a 'human face', i.e. the people who will be most affected by them must have the greatest consideration, so that they will be cushioned against all the harsh realities” (Jere-Mwiindilila, 1994). In her article “The Effects of Structural Adjustment on Women in Zambia,” she states that one of the ways to make structural adjustment programs work is to have citizens from the countries where the programs will be implemented involved in all aspects of planning and implementation, rather than just government, IMF and World Bank officials (JereMwiindilila, 1994). POVERTY REDUCTION AND GROWTH FACILITY (1999-2009) In 1999, The International Monetary Fund restructured the Enhanced Structural Facility again and developed the Poverty Reduction and Growth Facility (PRGF) (“Malawi and”, 2009). Where the primary objective of the ESAF was economic stabilization, the purpose of PRGF is poverty reduction. In earlier programs, the IMF


made efforts to reduce poverty in countries but often times it hurt the country more that it helped. The institution focused primarily on the economic factor and neglected the social implications and effects. To isolate this issue, the IMF began requiring the country requesting funds to issue a Poverty Reduction Strategy Paper (PRSP). This document was created to guide the country in their social and economic process and to set realistic goals and deadlines so the IMF could monitor progress more closely. One of the major issues with ESAFs was the involvement of the borrowing country in decisions concerning their loan. This document was created to eliminate the divide between borrowing countries and IMF officials. In order to be considered for funding the country must first submit a PRSP. This additional factor also helps indicate each country’s level of dedication to the program. As of August 2008, 78 low-income countries were available for PRGF assistance, this number has remained relatively consistent over the years. The annual interest rate of 0.5 percent based on a three-year note also remains stable. However, there have been some major transitions with PRGFs. A country can now borrow up to 280 percent of its IMF quota, which is double the ESAFs 140 percent (“The poverty reduction”, 2009). THE CASE OF MALAWI The PRGF program has been around for nearly 10 years and has loaned billions of dollars in relief support to poor nations. Malawi, an impoverished African country, requested aid from the IMF in 2005. This small landlocked country is one of the world’s most “densely populated and least developed countries” (“Malawi” 2009). Since its independence from Britain in 1964, Malawi has struggled with political instability and corruption. Current President, Bingu wa Mutharika, was elected in May 2004 under a party he formed, the Democratic Progressive Party. With his guidance and that of the Finance Minister, Goodall Gowndwe, Malawi has sought to undergo major economic renovations. The government of Malawi produced a detailed PRSP to the IMF where they then reviewed it and made changes and ultimately approved the document with restricting conditions. This PRGF is an interesting case because Malawi had previously requested aid and been granted funds in 2001 but they allocated it so poorly that no improvements were made, and the IMF dropped out of the program. To convince the IMF of their dedication to change, the Malawian government worked to produce a plausible strategy that encouraged economic and social growth. Malawi based their approach on four specific components: Pro-poor economic growth, human capital development, improving overall quality of life, and a protection system ensuring good governance (Mutasa, 2006). Three out of four of these pillars are social issues. In the three-year period of fund disbursement the country was evaluated semiannually six times. Malawi finished the last review in July of 2008 as the three-year period came to a closing. The report of Malawi’s economic progress was positive. The GDP increased, inflation rates decreased, and the overall economy grew by more than nine percent, which was triple the goal. All of these statistics show positive growth and economic improvement but they are not the only standards that were addressed. The IMF continues to allocate increasing amounts of money into the Malawian economy, which likely resulted in altered financial statistics. They were originally granted US $62 million in terms of the PRGF but as prices of goods began to rise the IMF gave more money to


Malawi to help balance the economy. Essentially, the IMF has used Malawi as an experimental project to work through problems associated with loaning money to developing countries. Malawi demonstrates one of the rare cases where the IMF has remained involved in structural policy. The IMF is greatly invested in the success of the structural adjustment policy in Malawi and has continually funneled money in to the program to fuel economic and social development. Malawi has shown financial advancement under the shelter of the IMF however the results are not conclusive and do not represent a trend. In this case, the IMF not only dictated economic allocations but they remained present monitoring proper distribution since 2005. This level of involvement is not common in other countries who have been granted PRGFs. Typically, when developing countries are loaned large sums of money under the PRGF, despite the countries ownership of the PRSPs, funds are not allocated as planned. Even if the funds are allocated appropriately it does not necessarily end in successful growth. The conditions of the IMF loan plans do not include room for unanticipated incidents; instead they require the country to strictly follow the PRSP outline. Because of the strict monitoring of Malawi, the IMF was able to judge when changes and increased funds appeared necessary. The Malawi study proves that impoverished countries need guidance. The PRGF program is structured for poor countries and by principle teaches them how to structure a detailed plan and maintain a strict budget. In this circumstance the IMF gave additional funding to Malawi rather than teaching it how to budget the resources at hand. Continually providing Malawi with more money solves its issues temporarily but does not prepare the country for the future without the aid of the IMF. Strategies and theories of economics and government budgeting are not learned and leave Malawi vulnerable to economic and social collapse. An additional point of concern is Malawi’s original PRSP. Three of the four pillars regarded social conditions and rights, yet in reported results these aspects were not included. African Forum and Network on Debt and Development researched this case study and in terms of social implications they reported that evidence was not conclusive because there were too many variables. Therefore the overall success of this facility is based on economic statistics, which only account for 25 percent of the proposed goal. FUTURE PLANS FOR THE IMF The IMF is changing the structure of the loan program again from the PRGF to the Extended Credit Facility. Specific details of this plan have not been released. Though it is inferred that the IMF is taking further steps to make correctional adjustments based on the reoccurring issues. Historically, each time the program evolves it increases in effectiveness. As seen in the cases of Zambia and Malawi, the allocation of funds doesn’t always yield a successful solution. During the current economic crisis budgets have been tightened, and countries, more than ever, are in need of aid. However, the IMF does not have enough funding to support the growth in requested aid. This creates a conflicting problem on a global scale. The IMF was created to provide relief during crisis, however it has not proved effective for developing countries. The IMF has a seemingly large amount of funds but proportionate to global need, its funding falls short. The pressing issue is what countries need aid the most. The IMF continues to struggle in developing


an effective plan to balance economic and social components. Although the economic needs of large, developed countries must be addressed, continual social problems, such as poverty and malnutrition in developing countries cannot be ignored because of worldwide economic crisis. The IMF must work toward a balance, equally evaluating the needs of both pressing issues. In addition to allocating funds globally, the IMF must create and maintain a balanced plan for each independent loan to developing countries. The conditions for the impending Extended Credit Facility have not yet been defined, however there is hope that they will take in to consideration reoccurring problems associated with the previous structural adjustment programs. To be successful the ECF must account for changes and incidents and must be willing to make alterations in policy to help countries achieve success. It must also strive for equilibrium between teaching successful budgeting and allocating enough money for the proposed budget to be attainable. The IMF and World Bank play an indispensable role in global development, in theory these organizations were created to provide beneficial development for countries in need. Even though, as illustrated in the Zambia and Malawi cases, beneficial development is not always achieved, IMF and World Bank’s plans were well intentioned. The multiple changes made throughout the years in structural adjustment programs reflect their willingness to make changes. The structural loan program is a work in progress, but as long as the IMF and World Bank remain willing to adapt to changes, they will continue to work toward building a successful program. REFERENCE (2006, September). IMF history and structural adjustment conditions. Retrieved from http://ucatlas.ucsc.edu/sap/history.php (2001, April). IMF lending to poor countries, how does the PRGF differ from the ESAF?. Retrieved from http://www.imf.org/external/np/exr/ib/2001/043001.htm#how Jere-Mwiindilila, Priscilla. (1994, June). The Effects of structural adjustment on women in Zambia. Retrieved from http://warc.ch/pc/rw942/02.html (2009, April 25). Malawi and the IMF. Retrieved from http://www.imf.org /external/country/MWI/index.htm (2009). Malawi. CIA world fact book. Retrieved (2009, October 30) from https://www.cia.gov/library/publications/the-worldfactbook/geos/mi.html# (2007, December 7). Malawi wins results and recognition for rebuffing world bank prescriptions. Retrieved from http://www.bicusa.org/EN/Article.3601.aspx. Mutasa, C. (2009). Assessing the impact of the poverty reduction and growth facility on social services the case of Malawi. Retrieved from


http://www.afrodad.org/downloads/publications/PRGF%20 Case%20Study%20Malawi.pdf Saasa, Oliver. (2002). Aid and poverty reduction in Zambia, mission unaccomplished [pp. 31-32]. Retrieved from http://books.google.com/books?id=2slh1hfnqiwC&pg=PA32&lpg Shah, A. (2008, October 28). Structural adjustment- a major cause of poverty. Retrieved from http://www.globalissues.org/article/3/structuraladjustment-a-major-cause-of-poverty (1999, September). The IMF's enhanced structural adjustment facility: is it working?. Retrieved from http://www.imf.org/external/pubs/ft/esaf/exr/index.htm (2009, July 31). The Poverty reduction and growth facility. Retrieved from http://www.imf.org/external/np/exr/facts/prgf.htm Valdimarsson, O. (2009). Iceland to get $167.5 million loan installment after IMF review. Bloomberg, Retrieved from http://www.bloomberg.com/apps/news?pid=20601068&sid=agoYjdZoZ xNA (2009). What is IDA?. Retrieved from http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/IDA/ 0,,contentMDK:21206704~menuPK:83991~pagePK:51236175~piPK:4 37394~theSitePK:73154,00.html (2009, October 28). Zambia. Retrieved from https://www.cia.gov/library/publications/the-worldfactbook/geos/za.html (1999, March 10). Zambia enhanced structural adjustment facility policy framework paper. Retrieved from http://www.imf.org/external/np/pfp/1999/zambia/  

Structural Adjustment during Economic Crisis  

This research paper focuses on the opportunities and challenges facing the World Bank and International Monetary Fund when lending money to...

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