Of structural adjustments By A B SHAHID

ARTICLE (April 10 2010): According to renowned economist Joseph Stiglitz, "IMF structural adjustment policies - the policies designed to help a country adjust to crisis as well as to more persistent imbalances - led to hunger and riots in many countries; even when results were not so dire, and managed to eke out some growth for a while, often the benefits went disproportionately to the better off."

What amazed him, however, "was that those [structural adjustment] policies weren't questioned by many of the people in power in the IMF... They [the IMF policies] were often questioned by the people in the developing countries, but many were so afraid they might lose [the] IMF funding and with it funding from others, that they articulated their doubts most cautiously, if at all, and then only in private."

Tragically, "inside the IMF it was simply assumed that whatever suffering occurred was necessary part of the pain the countries had to experience on way to becoming a successful market economy." The IMF's decisions "were made on the basis of what seemed a curious blend of [free market] ideology and bad economics, and dogma that sometimes seemed to be thinly veiling special interests."

Stiglitz, a Nobel laureate and former Chief Economist of the World Bank as well as a member of President Clinton's Council of Economic Advisors, made these remarks in the preface to his book "Globalisation and its discontents". The fact that he has been a university professor and economic advisor to both the US government and the World Bank, gives his observations a great deal of credibility.

He cites the "ideology-bad economics" blend as the key flaw. How bad is this blend was pointed out by Professor Greg Mankiw of Harvard University, who recently said that "students can hardly be expected to make sense of the [current] crisis if they know nothing about things like the role of financial institutions", ie excessive leverage, over-dependence and systemic risk that culminated in the current crisis. Relying on out-dated structural adjustment strategies is a dumb idea.

The key issue is containing the erosion of prudence in governance that economic axioms and theories don't take into account. Failure of structural adjustment policies in developing countries proves that the first issue to be addressed is corruption-driven resource waste, if it continues, no strategy, no matter how perfect, can deliver the desired results.

Given the bad governance of the state, Pakistanis would like to know which part of the economy has been 'restructured'? Has inflation come down to a low single digit? Has the rupee's value appreciated? Has public expenditure been contained? Has the tax-to-GDP ratio gone up? Has the circular debt been settled instead of being shifted to the banking sector? Has the public debt-to-GDP ratio improved?

Pakistanis find that pursuing the IMF policies, conditions have only worsened because all that the IMF prescribes for a poverty-stricken Pakistan are incorrectly focused on taxation measures to plug the fiscal gap. The fact that the IMF has, at least openly, not done enough about plugging resource leaks in the public sector and rampant corruption therein, is disappointing.

The IMF, therefore, hasn't pushed the regime enough on preventing organised frauds that were recently unearthed in many state offices and state-owned entities, and has made no visible efforts to ensure transparency in new hiring for key positions, quick recovery of losses, improved management, and stiffer accountability to prevent a repeat of such incidents.

Presently, among Pakistan's many lenders, the IMF exercises the strongest clout, and has the final say in how the state makes use of national financial resources. Any laxity on the part of the IMF in ensuring optimal use of scarce resources could endanger the interests of the other lenders because more of national savings (the debt repayment source) are steadily being channelled into state offices to pay their current expenditure.

Talking of other lenders, the latest is that Pakistan has now become the third most likely country to default on its debt repayment commitments. What impact this adverse rating will have not just on the public sector but the private sector as well, isn't difficult to fathom.

Pakistan's higher risk rating will add to the already cost-heavy private sector's risk costs while dealing with foreign markets. Most worrying are the state's tendering and purchasing practices. Non-transparent purchases and blockage of national savings in over-priced, unproductive, or rapidly wasting assets accounts a huge proportion of public debt.

Besides several other instances (wheat, steel billets, RPPs, LNG, etc) of tendering that suited "special interests", import of sugar last year as well as now, is an open and shut case of resource misuse. Resource misuse is also starving the private sector of the funding back-up, it badly needs to assure as low as 2.5 percent growth in GDP and a commensurate rise in tax revenue.

Ironically, the World Bank and the Asian Development Bank faulted these transactions although the impact of these transactions on CPI and its snowballing effect on the rest of the economy should have been the concern of the IMF. There are no signs yet that the government will implement the 'austerity plan' that was the only right step suggested by the then finance minister, Shaukat Tarin.

Along with the austerity plan lies buried the hope of cutting the government's current expenditure. As of now, commercial bank deposits, are funding the almost endless losses resulting from mismanagement of the state. These deposits should have been channelled into business and industry to spur growth and generate employment opportunities.

Hopefully, quite unwittingly the IMF policies are helping the "special interests" to go on doing the harm they are doing while ordinary Pakistanis are to be lumbered with fresh taxes; given their falling real incomes courtesy the oft denied rise in CPT, they are unlikely to deliver on this expectation.

More so, because fresh taxes (eg VAT at the retail level) are to be collected without a credible system Besides power loadshedding, the factor preventing a rise in economic activity (and thus tax revenue) is the policy rate that stays high, courtesy inflation, and thus keeps the cost of doing business (and inflation) illogically high.

This vicious circle hasn't been broken because funds borrowed from the IMF lie in the SBP delivering zero economic benefit except for keeping the rupee from plunging further. How far will these 'frozen' reserves stabilise the rupee when Pakistan's politics take the inevitable plunge (preventable by transparency, rational economic and taxation policies, and containment of inflation), is a moot point but what certainly isn't is the importance the IMF attaches to ground realities that can frustrate theoretically the most well thought-out structural adjustment plans. Isn't that happening right now?

Source: http://www.brecorder.com/index.php?id=1042786&currPageNo=1&query=&search=&term=&supDate=