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Colección:
La Educación
Número: (116) III
Año: 1993

Structural Adjustment Policies in the Caribbean1

Structural adjustment is the process of deliberately adjusting or changing the structure and organization of the economy to mitigate the effects of negative shocks or to take advantage of new opportunities or challenges. The general aim of structural adjustment is to more effectively and efficiently achieve the objectives of economic development, that is, economic growth, poverty alleviation, productive employment, social services provision (housing, health, education, transport) and environmental protection. The need for structural adjustment derives from external shocks (e.g., oil price increases, world recession, hurricanes); weaknesses in the structure of the economy (e.g., dependence on a single crop/service, inappropriate institutions) or flaws in domestic economic policies (e.g., expansionary fiscal policies,excessive external borrowing).

Structural adjustment consists of two basic components: first, a stabilization component where defensive short-run macroeconomic adjustment policies (monetary, fiscal, trade and incomes policies) are used to counteract negative shocks. Secondly, a developmental component which involves long-term changes in the operation of the economy, that is, policy reform, institutional changes, and production reorientation. These two components are not mutually exclusive since short-run macroeconomic policies can have an effect on the long-run performance of the economy.

The recent interest in structural adjustment has been kindled by the lending activities of international financial institutions, such as the International Monetary Fund (IMF), the World Bank (WB) and the Inter-American Development Bank (IDB), in a number of developing countries which have been experiencing severe economic problems. Structural adjustment programs have been adopted by a number of Caribbean countries (Barbados, Dominica, Grenada, Guyana, Jamaica, and Trinidad & Tobago) since the late 1970s along IMF-WB lines in order to solve the problems of growing foreign debt, fiscal and balance of payments (BOP) deficits, shortage of foreign exchange, stagnant productive sectors (especially the export-oriented sectors), and rising levels of unemployment.

The general set of policies associated with the IMF-WB model of structural adjustment are outlined in Table 1. The stabilization program is largely demand-side driven with the central aim being the reduction of effective aggregate demand via expenditureswitching and expenditure-reducing policies. The IMF is usually at the forefront of the stabilization program which involves fiscal restraint (reduction in government expenditure and increases in taxation); tight monetary policy (increases in interest rates, reductions in domestic credit); the introduction of user charges for social services; exchange rate adjustment (usually a devaluation); and incomes policy based on a wage reduction or wage freeze. The structural reform program is supply-side driven and is generally associated with WB-IDB lending. The central aim of this reform program is the provision of a new institutional and policy framework to enhance economic growth and development via private sector direct investment. The underlying assumption of the reform program is that the private sector can more effectively and efficiently undertake a range of activities currently provided by the public sector. The reform package usually involves tax reform, trade and tariff reform to increase competitiveness and productivity in the export-oriented sectors, financial liberalization to promote savings and investment, privatization of public operations via outright sale or contracting out, deregulation of the economy to reduce the transactions and administrative costs of doing business, public sector reform, and the creation and strengthening of institutions to service the private sector.

Since the early 1970s Caribbean economies have been subjected to a number of external shocks—oil price increases in 1973/74 and 1979/80, recessions in the world economy especially the USA, a fall in oil prices 1982 and 1986/87, collapse of bauxite export earnings in 1985, high foreign interest rates, hurricanes—along with a rapid expansion of government expenditure which have forced them to undertake some kind of economic adjustment. These shocks created financial imbalances manifested in twin deficits on the BOP and public sector accounts. Jamaica and Guyana have had the most traumatic experiences with structural adjustment in the region.

Since August 1977, Jamaica has been engaged in a structural adjustment process along IMF-WB-IDB lines. With the assistance of the international financial institutions, Jamaica has sought to adopt a private sector-led, export-oriented growth strategy. After a shaky start in the late 1970s when it was unable to meet performance criteria and talks broke down with the IMF on several occasions, Jamaica adopted a more purposeful structural adjustment program in the 1980s.

Jamaica’s structural adjustment program has been the most comprehensive in the Caribbean. Faced with unsustainable fiscal and BOP deficits and a rapid growth in its external debt, Jamaica entered into a series of loan arrangements with the IMF and the WB (see Table 2). Jamaica has made use of the Standby, Extended Fund and Compensatory Financing Facilities of the IMF in an effort to stabilize the economy in the short run. Although the conditions or requirements for loans varied over the period of association with the IMF, the policy package did not vary substantially from the “traditional” IMF package for overcoming fiscal and BOP problems. For example, the 1977 and 1978 agreements called for the devaluation of the exchange rate, price liberalization and limits to wage rate increases, increased taxation, limits on the net domestic assets of the Bank of Jamaica, ceilings on bank loans and advances to the private sector, and a halt to the government expansionary policies via the reduction in government expenditure. The broad framework adopted in the late 1980s and the early 1990s called for the reduction of financial imbalances, the strengthening of the economic infrastructure, greater investment in human capital, improvement in the social services, and the provision of a safety net for the poorer segment of the population, given the great disparities of income and wealth in Jamaica. This broad economic framework has formed part of the government’s Economic Recovery Program and has been assisted via structural adjustment loans (both general and sectoral) from the World Bank and the IDB.

TABLE 1
TABLE 2

The “economic liberalization” of the Jamaican economy has involved the design of a reform program aimed at stimulating private sector investment thus fostering economic growth and strengthening the government’s financial position. The reform program has involved the liberalization of the import licensing system; the floating of the Jamaican dollar; tariff reform; the ability to hold foreign exchange accounts; comprehensive tax reform; improvement in the tax administration process; the introduction of a general consumption tax; the control of government expenditure via retrenchment, attrition, phasing out of subsidies to public enterprises, and divestment of state assets; the reduction of capital expenditure; the rehabilitation of transport, power and water systems; the promotion of foreign investment and financial liberalization and the strengthening economic institutions.

Between 1986 and 1988 there were signs of improvement in both the BOP and the fiscal accounts. The ravages of Hurricane Gilbert in 1988, however, derailed economic progress. During 1989 the economy was faced with a growing over-valuation of the exchange rate, a weakened fiscal position, and a build-up of commercial arrears. The government sought financial assistance from the IMF in 1990 which called for further contractionary policies (strict demand management policies using fiscal and monetary policy instruments, wage guidelines, the introduction of a general consumption tax in October 1988, increased interest rates, and greater liberalization). Continued difficulties in the BOP resulted in the authorities floating the Jamaican dollar against the US dollar in 1991. The macroeconomic environment is still unstable thus making the recovery progress more difficult and lengthy.

In general, the program of economic liberalization (de-regulation) of the Jamaican economy has met with moderate success to date. Inflation and interest rates remain very high, devaluations have increased the cost of servicing both the domestic and foreign debts, while unemployment, though declining slightly, still remains high. The informal sector has also been buoyant. The mining, tourism, and export agricultural sectors have responded positively to the economic measures in recent years. While the fiscal deficit as a percentage of GDP has declined substantially, the BOP position still remains a concern for the Jamaican authorities.

Prior to 1977, Guyana’s economic development was based on the state control of the economy. The government pursued a socialist-oriented economic strategy which involved the nationalization of key sectors of the economy; the regulation of trade, prices and finance, and the social provision of housing, education, and health. With the recession of 1977-79 and a deterioration in the commodity terms of trade, the economy experienced severe financial imbalances on both the BOP and public sector accounts. Since 1977, the country has been undergoing a process of structural adjustment with the assistance of the IMF, IDB, and the WB. In 1978, Guyana received IMF assistance via a standby loan for SDR 15m together with credits from the International Development Association (Worrell 1987, 93).

The country was required to cut government capital expenditure, with a wage freeze for civil servants and increased taxation imposed. Although Guyana has had a more limited contact with the IMF and WB than Jamaica because of its inability to access IMF and WB funds between 1985 and 1990 due to the inability to meet its financial obligations, it adopted a series of adjustment measures during the 1980s (see Table 3).

TABLE 3

Guyana’s stabilization cum adjustment package has involved a reduction in government expenditure via retrenchment, wage cuts, removal of subsidies, etc., increases in taxation and improvement in tax administration, a series of devaluations in order to improve international competitiveness, the elimination of price controls, increases in interest rates, the introduction of user charges, and the divestment of public enterprises (telecommunications, rice milling, sugar, forestry, etc.). A cambio market was established in March 1990 as a step toward unifying the exchange rate system. The ultimate unification of the exchange rate (i.e., the cambio and official markets) in 1991 and the privatization process permitted a build-up in foreign exchange reserves in 1991. Guyana first received a structural adjustment loan in 1980 and then a sectoral structural adjustment loan in 1990 for SDR 59.8m to assist with the rehabilitation of the economy.

As in the case of Jamaica, the structural adjustment process in Guyana has reaped moderate success. Tight monetary and fiscal policies, high rates of inflation, declining real wage rates and transfer payments, and declining real per capita social expenditure have reduced the economic welfare of the citizens. Deterioration in the social services has occurred over the years which, coupled with emigration, has affected the human capital base of the country. The social cost of adjustment has been high, and this has affected the recovery process.

Trinidad & Tobago undertook an adjustment program without IMF assistance up to late 1988. The fall in oil prices in 1982 followed by economic contraction forced the government to adopt its own adjustment program. Between 1982 and 1986, the government sought to control its expenditure and introduce a multi-sectoral development plan aimed at reducing the dependence of the economy on the petroleum industry. The collapse of oil prices in 1986 brought further economic problems—shortage of foreign exchange, debt accumulation, and increased fiscal deficit. The new government in 1987 introduced a series of measures to combat the economic problems—suspension of COLA and merit increases for public servants; cuts in transfers and subsidies; sale of unprofitable state enterprises; modification of the direct taxation structure; and the introduction of user charges. With the bunching of foreign payments beyond the foreign exchange capacity to the country and a high and unserviceable fiscal debt, Trinidad & Tobago sought IMF assistance in 1988. Since the country had devalued its currency before going to the IMF, it was required to change the exchange rate only if required (i.e., exchange rate management). An external contingency mechanism was designed primarily to provide financing in the event that external developments threatened to derail the adjustment program. The IMF adjustment program included fiscal policy measures (wage and salary freezes, reduction of transfers, tax reform and the introduction of a VAT, higher user charges, and limits on the banking system’s financing of the public sector); price policy measures (the removal of a number of items under price control and the removal of subsidies); monetary policy measures (limits on Central Bank advances to commercial banks, increases in the discount rate, etc.); and BOP policy measures (the removal of items on the negative list, the introduction of tariffs, and limits on the accumulated external debt). Although the Trinidad & Tobago economy has showed signs of recovery, there are still areas of underlying instability in the economy. A World Bank structural adjustment loan (US$40m) was recently put on hold until the country satisfies certain conditions (dismantling the negative list—a list of banned and restricted imported goods, the gradual elimination of import duty exemptions, trade facilitation, and improvement in customs administration). Although trade liberalization has been a prerequisite for the loan, the country has not been asked to change its exchange rate from its pre-IMF level.

Barbados is the most recent country to undergo a process of structural adjustment. The stabilization program adopted by the government, with assistance from the IMF, involves a reduction in government expenditure via a wage cut and lay-offs, tight monetary policy, increases in taxation and user fees, and the removal of concessions granted to manufacturers. The government has also designed a reform program aimed at improving external competitiveness and encouraging the efficient allocation and use of resources via privatization and restoring financial stability. The reform program involves the standard package of trade and tariff reform, tax reform, financial reform, administrative reform, and privatization. As part of the IMF agreement, the Barbadian dollar has not been devalued. Barbados has opted for an alternative remedy for a BOP deficit, namely a tight monetary policy coupled with an “import” tax-exports subsidy scheme. Although export subsidies have not been explicitly used, consumption taxes have been increased on imported goods.

The experience of Caribbean countries suggests that the costs of adjustment can be high in terms of unemployment and reduced standard of living during the initial stages of the adjustment process. Programs have been designed to increase the foreign exchange earning capacity of the countries via private sector development.