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IMF Programs And Poverty In South Asia
Dr.Akmal Hussain
Newspaper: Daily Times
Dated: Thursday, August 22, 2002
 

INTRODUCTION

South Asia today stands suspended between hope of a better life, and fear of a cataclysmic death. The hope emanates from the tremendous human and natural resource potential, the richness and variety of its civilizations. The fear arises from the fact that South Asia is not only the poorest region in the world, but also one, where the probability of an accidental nuclear war is perhaps greater than in any other region of the world.

Governments in South Asia have primarily pursued "national security" through increasingly destructive military apparatuses, rather than seek citizens' security through actualizing their creative potential. After fifty five years of independence we find that increasing numbers of people are suffering from hunger, illiteracy and preventable diseases. Children who embody our future are in a far worse condition. The majority are suffering from malnutrition, with 99 out of every 1000 children born, dying before the age of one. Out of those who survive the one-year barrier, millions die due to water borne and preventable diseases; almost half the school age children do not get the opportunity of even primary education. Out of those too poor to go to school, millions of children are engaged in labour: Many are maimed, blinded, and struck with lung diseases and brain deformities related with poisonous emissions at work places. We are witnessing a massacre of the innocents. That inspite of this fact, South Asian governments are directing increasing resources to building weapons of mass destruction, raises the problematique of governance. In the ensuing two articles we will explore the relationship between persistent poverty, economic policy and the nature of governance in South Asia. In this week's article we will focus on the relationship between IMF Structural Adjustment Programs in South Asia and the poverty phenomenon.

1. IMF PROGRAMS AND POVERTY

Macroeconomic policies associated with the IMF Structural Adjustment Programs adopted in varying forms by South Asian countries have, by and large, had an adverse impact on poverty and income distribution. In the pursuit of these programs South Asian countries have undertaken three sets of policy measures each of which as the following analysis shows, have served to accentuate poverty:

i) Liberalization of imports and withdrawal of subsidies from domestically produced goods and services. This has lowered the prices of imported consumer goods relative to the prices of domestically produced goods. This tendency has been accentuated by distortions in the tariff structure under which, in many cases, the import duties on finished consumer goods have fallen more sharply than on imported industrial raw materials and intermediate goods. Consequently, imported consumer goods have become relatively cheaper, thereby, crowding out domestically produced goods. This has been a significant factor in slowing down growth of the domestic manufacturing sector, and in increasing unemployment.

Subsidy withdrawal under IMF conditionality in South Asia has occurred in the case of food, fertilizer, irrigation water and utilities such as gas and electricity. Since these goods and services constitute a relatively larger proportion of expenditure by the lower income groups, there has been a greater impact on the real incomes of the poor relative to the rich. Moreover, small and subsistence farmers who have no marketable surplus find that their production costs have increased (following subsidy withdrawal on fertilizers, irrigation water and pesticides), while they enjoy no compensatory gain from increased prices of food grain (following subsidy withdrawal on wheat).

Interestingly, while prices of goods and services, which have a greater weight in the poor man's basket have increased, the prices of imported goods consumed by the rich have fallen. This is another factor in accentuating the inequality in income distribution.

ii) The second policy conditionality of the IMF structural adjustment programs pursued in South Asia, is exchange rate devaluation. This has accelerated inflation to the extent that domestically manufactured goods depend on imported inputs and hence suffer increasing cost per unit, following devaluation. Higher inflation rates have relatively greater impact on the poor who have fewer resources to fall back on compared to the rich. Another factor in accentuating inequality in income distribution following inflation is that with monopolistic market structures, manufacturers can pass on the increased cost of living through increasing the prices of goods they manufacture. By contrast, poorly organized workers are unable to negotiate wage increases at the same pace as inflation.

iii) The third element in the IMF policy program is a constriction of the money supply. This is inherently recessionary: Interest rates rise and credit availability for private sector investment declines. At the same time, reduction in public sector expenditure associated with reducing the fiscal deficit dampens aggregate demand.

In Pakistan the growth of money supply fell from 46.5 percent during the period 1984-87 (the pre-structural adjustment period) to 40.6 percent during 1988-91 (the post-adjustment period). The raison d'être of the reduction in money supply was to reduce inflation. Yet the inflation rate far from falling, actually increased from 4.7 percent in the pre-adjustment period to 9.5 percent in the post-adjustment period. This is because of the persistence of structural imbalances that underlie Pakistan's inflation rate, such as slow growth of food output, deteriorating infrastructure, and slow growth in domestically produced industrial inputs and machinery. (Inflation rates in the late 1990s in Pakistan have declined but this is essentially due to the sharp slow down in investment and GDP growth. Nevertheless even here, the inflation rate for the poor household's consumption basket is higher than the average rate).

The Indian experience also shows that attempts at reducing inflation through a tight money policy and reduction in the fiscal deficit under the IMF economic stabilization program have not succeeded. Professor Deepak Nayyar in a brilliant analysis of the economic liberalization experience in India shows that inspite of initiating a macroeconomic stabilization program in mid-1991, the inflation rate actually increased during 1991-95. He argues that during this period, despite the fact that there were good harvests and no exogenous shocks, the economic stabilization policies failed to bring down the inflation rate, the highest in the history of independent India. Professor Nayyar proposes that the positive impact of the policy of money supply contraction on inflation, may have been dampened by the "real dis-proportionalities underlying the inflationary pressures…" Similarly, in Pakistan's case there is evidence to suggest that the institutional constraints to output growth of essential commodities has resulted in accelerated inflation, and reduced real incomes of wage workers and self-employed in both rural and urban areas.

In the case of India, Professor Nayyar has shown that the prices of the basket of essential commodities during the period 1991-95 (when the Structural Adjustment Program was being implemented) rose at a rate unprecedented since independence: Prices of food grains rose by 90 percent during the period, the prices of primary food articles by 77 percent, and the prices of manufactured food products by 62 percent. He argues that in a period where real per capita income remained stagnant, such high inflation rates in basic necessities may have been a significant factor in increasing poverty.

The policy of contraction of the money supply under the IMF program gave Pakistan the worst of both worlds: It failed to increase the real incomes of the poor through lower inflation rates, while at the same time it slowed down GDP growth. In Pakistan's case high interest rates combined with a dampening of aggregate demand induced by a sharp reduction in development expenditure, served to slow down GDP growth, particularly the large scale manufacturing sector. Thus for example, GDP growth fell from 6.2 percent during 1985-88 to less than 4 percent to-day. Growth of the large-scale manufacturing sector declined from 8.3 percent in the mid-1980's to an average of 2.96% during the period 1997 to 2001. This sharp slow down in growth of the large-scale manufacturing sector would be expected to increase unemployment. The tendency towards increasing unemployment is accentuated by the fact that in Pakistan, the elasticity of employment with respect to output has been declining during the 1990's.

This means that for given growth rates of output, employment generation in the manufacturing sector is declining. As output growth in this sector has declined, clearly the downward pressure on employment has been intensified. It is not surprising therefore that the growth rate of employment in this sector has declined from 12.7 percent in 1986/87 to minus 4.2 percent in 1993/94.

It appears that the macroeconomic stabilization programs adopted in both India and Pakistan under IMF auspices have served to slow down GDP growth, accelerate inflation and accentuate poverty and unemployment.

2. GOVERNANCE AND IMF PROGRAMS

The usual defence by the IMF bureaucracy of the widespread failure of its Structural Adjustment Programs is that the governments concerned did not implement the conditionality package rigorously enough. This is a weak argument: If the analytical framework within which the IMF conditionalities are constituted, is to be adequate, then it must include an understanding of the institutional constraints to implementation on recipient governments. As Joseph Stiglitz (Senior Vice President and Chief Economist, World Bank) has pointed out:

"To suggest that the policy of financial or capital market liberalization would have worked, if only the government had had adequate regulatory institutions, misses the point that few developing countries have such institutions and that those weaknesses should have been addressed prior to the deregulation".

Yet recipient governments cannot entirely be let off the hook either. It can be argued that the adverse impact of the Structural Adjustment Program on the poor was exacerbated by the institutional context within which the Program was applied. The fact that inspite of a sharp reduction in development expenditure and in the growth of the money supply, the fiscal deficit and inflation rate could not be adequately reduced, was rooted in four failures of governance: (a) Failure to recover bank dues from loan defaulters by public sector banks. (b) Failure to stem the fiscal hemorrhage resulting from large losses of public sector corporations. (c) Failure to drastically reduce non-development expenditure of the government. (d) Failure to broaden the tax base to bring a much larger number of income earners into the net.

Such failures have occurred in varying degrees in South Asian countries, and are rooted in the peculiar nature of governance in these countries. In the prevalent political culture, political support of socially influential individuals and groups is to some extent acquired and maintained through patronage in which resources and employment decisions under the direct or indirect command of the State are siphoned off to such individuals and groups. Market criteria and merit in the operations of public sector corporations and banks are often ignored. This is particularly so when governance is based on traditional patron client relations where biraderis and sifaarish continue to be important factors in mobilizing political support.

IMF Structural Adjustment Programs in South Asia have brought misery to millions of people by slowing down GDP growth and accentuating poverty. The institutional weaknesses of governments further exacerbated poverty. Yet governments in South Asia are in principle accountable to their people for bad governance. The question is, can the IMF be made accountable for its bad economics?

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