Answer to Question #237252 in Economics for Aliyah

Question

Discuss the expected impact and outcome of the Structural adjustment programs (SAPs) provided by the International Monetary Fund (IMF) and the World Bank (WB) in Third World countries with special reference to Zambia

Answer 1

Structural Adjustment Policies are economic policies that countries must follow in order to qualify for new World Bank and International Monetary Fund (IMF) loans and help them make debt repayments on the older debts owed to commercial banks, governments, and the World Bank. Although SAPs are designed for individual countries but have common guiding principles and features which include export-led growth; privatization and liberalization; and the efficiency of the free market.

SAPs generally require countries to devalue their currencies against the dollar; lift import and export restrictions; balance their budgets and not overspend; and remove price controls and state subsidies.

Devaluation makes their goods cheaper for foreigners to buy and theoretically, makes foreign imports more expensive. In principle, it should make the country wary of buying expensive foreign equipment. In practice, however, the IMF actually disrupts this by rewarding the country with a large foreign currency loan that encourages it to purchase imports.

Balancing national budgets can be done by raising taxes, which the IMF frowns upon, or by cutting government spending, which it definitely recommends. As a result, SAPs often result in deep cuts in programs like education, health, and social care, and the removal of subsidies designed to control the price of basics such as food and milk. So SAPs hurt the poor most because they depend heavily on these services and subsidies.

SAPs encourage countries to focus on the production and export of primary commodities such as cocoa and coffee to earn foreign exchange. But these commodities have notoriously erratic prices subject to the whims of global markets which can depress prices just when countries have invested in these so-called 'cash crops'.

By devaluing the currency and simultaneously removing price controls, the immediate effect of an SAP is generally to hike prices up three or four times, increasing poverty to such an extent that riots are a frequent result.

The term "Structural Adjustment Program" has gained such a negative connotation that the World Bank and IMF launched a new initiative, the Poverty Reduction Strategy Initiative, and makes countries develop <em>Poverty Reduction Strategy Papers</em>&nbsp;(PRSP). While the name has changed, with PRSPs, the World Bank is still forcing countries to adopt the same types of policies as SAPs.