The primary aims of the Fund are to promote global monetary cooperation, exchange rate stability, and providing financial assistance to member countries ease balance of payment deficit However, member states, would have to accept and adopt the Fund’s lending policies which require participating countries to undergo structural reforms. Hence, structural adjustments are a set of macro economic stabilisation policies applied by (IMF) to borrowing countries and are designed for borrowing individual state, Furthermore, the underpinning principles on the IMF stabilisation policies are based on free markets or neo-liberal approaches which encourage minimal state intervention in the economy .So in this regard, borrowing countries are encouraged adopt sets of policies .This essay will discussed the Fund’s stabilisation policies and investigate their impact on adjusting countries with respect to human development .The essay will examine the International Monetary Fund stabilization policies on Latin America over the period of 1980 to 1990.The region is volatile with a history of exceptionally high inflation rates, record of unsuccessful both monetary and fiscal stabilizations as well as substantial macroeconomic instabilities.
Therefore, this essay analyze the impact of IMF macroeconomic stabilizations policies in the region between 1980 to 1990 and investigating a decade of structural adjustments in this continent may provide a higher degree of accuracy. Latin American countries endured severe economic crisis such as higher level of debt to global creditors and worldwide recession which worsened the region’s trade deficit. Given the state of the crisis in the 1980s, many countries in this region had to seek financial assistance from the IMF to stabilise their economies as well as reducing balance of payment deficit. Therefore all countries had agreed to set of structural adjustment packages attached to the loan and those were based on neo-liberal economic theory. The main principle of neo-liberal policies aim to transfer part of the economy from the state to private owned enterprises, reduce government spending and deregulation allowing free markets as a standard for economic efficiency.
So the period (1980-1990) under examination in this easy is essential in assessing the really impact of IMF structural adjustments on this regional grouping and each policy will be investigate in detail.
The stabilization phase of adjustment focuses on demand restraint policies, usually implemented by large reductions in government expenditure via measures such as subsidy removals, public sector employment cuts. In addition to that, IMF orthodoxy stabilisation policies involve realignment of the real exchange rate through devaluation, free trade, privatization and liberalization of interest rates and tax reform. Latina American countries have been following the soviet model of economic development where the state provides almost all basic needs such as education, health care and other social welfare spending. However, as the debt crisis and decline in demand for exports continued, expansionary fiscal expenditures merely collapsed due to lack of government funding as structural adjustments required the region cut their spending power in order to create a balanced and sustained deficits. The whole region had a fiscal deficit nearly $400 billion dollars including interest payments or almost 50% of regional GDP in the early 1980s (Theberge, A., 1999).However, budget deficits were improved significant during adjusting years but it had immediate cost on economic development.
Fiscal policy
As the region went through structural adjustment processes, there were incidents of sharp rise poverty in Latin America throughout the 1980s and the number of households in extreme poverty rose to nearly 40%. However, the most people suffered from poverty were the rural population as it affected almost half of the region’s population .Furthermore, there similar episodes in urban areas where it grow from about 25% in early 1980s to almost 60% by 1990. In addition to that, inequality in all adjusting countries and the main victims were middle-income urban groups as most those communities became unemployed due to mere collapse of the formal sector economy. Real wages are usefully economic measures in determining the region’s wealth in any given time as inflations is being taken into consideration For example, a decade of structural adjustment in Latin American economies witnessed rapid decline in real wages than the previous three decades of post war period (Woller, G.M and Hart, D.K, 1995). Also the growing gap between the rich continued to widen as government subsidies were abolished thereby creating an unfavourable economic condition for the low income household earners. On the other hand, the rich were the main beneficiary of the crisis as global capital outflows allowed them to shelter their wealth and to capture speculative gains devaluation of their national currencies. Therefore, it appears as though IMF `s macroeconomic stabilisation policies had a negative impact on economic development as contraction government expenditure caused severe economic damage to the region witnessed with rise of poverty and inequality( Janvry.A and Saldoulet.E,1993).
Consequently, per capita income decreased dramatically during the early 1980s through the late 1980s pushing ordinary people into poverty as regional gross domestic products due to decline in investments .For instance, years of structural economic reforms in Latin American countries were associated with decline of formal sector productivity, which should be the main pillar for economic growth by providing employment and employment creation. Also reduction of government expenditures on public services such as the health care, education, subsidies and other welfare benefits further exacerbated the situation. Given that most household was either unemployed or engaged in informal jobs and adopting tighter monetary regime made investment unlikely as borrowing and loan repayment became too costly. Therefore, the Fund’s stabilisation policies look as if they had a negative effect on economic development in the region. Furthermore, there were incidents of recurring recession in the region because of lack of major investment necessary for economic development .Economic instability worsened by increase in domestic interest rates which in turn discouraged the overall investments required by adjusting countries in the region and thus there was a general decline in the overall investment level far below the 1970s. As a result, IMF`s macroeconomic stabilisation policies are most like to cause or worsen the economic crisis than solving it and there has been a lot of criticism about the Fund’s sponsored programs in adjusting among countries as structural reforms are too harsh especial for heavily indebted countries.
Liberalism of the domestic economy
Moreover, most Latin American economies were highly regulated, safeguarding inflow of foreign investments and outflow of profits remittances as well as establishment of firms. In addition to that, prices were controlled by the government, high corporate income tax rates and trade barriers made it were put in place as a measure of protecting domestic industries (Williamson.J, 2002).Therefore, contradict IMF-sponsor ed stabilization policies to liberalise domestic markets as too much government intervention is believed damaging economic development. The regulatory environment seemed as though it was not favourable to encourage investments which were necessary for economic development in the region. Thus the Fund’s stabilisation policies urged Latin American countries to deregulate their economies as a way of promoting competition and a free domestic market is perceived to encourage foreign direct investments. In that regard all adjusting countries started eliminating price restrictions, removal of government subsidies and adopting flexible exchange rates as well as devaluation of domestic currencies. Given the extent of the crisis, in the 1980s such policies appeared to have exacerbated the situation in Latin American region during adjusting years. For example, inflation rose from about 40% in 1980 to nearly 130% towards the end of 1980s and then, the average regional inflation rate was about 280% (Tanzi.V, 1992).
Therefore, easing price controls, removal of government subsidies, flexible exchange rates and subsequent devolution of domestic currencies gave rise to accelerating inflation causing massive human suffering. The cost of basic consumables products such as food, fuel, transport and health care rose rapidly in almost all participating countries mainly because of inflation and cuts in government subsidies. For example, there were incidences of malnutrition throughout the region exceeding 50 % child population in many countries with Peru encountered the highest number of malnutrition cases (Woller. G, M. and Hart. D. K, 1995). In this regard, IMF`s structural adjustments programs look as if they encouraged economic instability in the region as national income declined along with a decrease in human development.
Privatization
The Fund’s macrocosmic policies required all adjusting countries to private all state owned enterprise and national resources as privatization is perceived to provide effectiveness management than state run firms. Hence, effective administrations, may lead to better productivity which was necessary for economic development fro these countries. In other words, the whole policy objective on privatization was to reduce government involvements and to present a competitive economic environment for business. Therefore, fiscal deficits in Latin America was partly caused by over spending especial funding state owned companies which were making loses because of poor management and inefficiency. Given that liquidity became a major problem in Latin American due to the debt crisis so, privatizations seem to be an important policy instrument to adjusting countries as governments can concentrate on other investments required for economic development. Though, privatizations provide the basis for economic efficiency and present favourable conditions for long term economic development to Latin American countries in the 1980s, the perceived benefits of privatization need a comprehensive analysis. Previously, governments were the main services provider of health care, education and transport as well as other social welfare benefits to citizen privatization seemed to have exacerbated inequality among various societies. Privatization of state owned enterprises in such an extreme case seemed to have played a major role in mere economic collapse of the region because it can encourage dramatic increase in inflation driven from the micro point of view. Given that, production declined during the 1980s to 1990 those few firms remained operational could increase their prices freely thereby inflicting inflationary gap. As a result, the cost of living increased in all adjusting countries as price of basic commodities rose sharply
Trade policy
The world economy experienced economic shocks 1980s due to rising oil prices and falling demand on exports for basic commodities in the world market. Given that the Latin American countries are primary based economies and as such much of their national revenues depended on exports to fund trade deficits and paying off to lenders as well as financing public services. As a result, the recession embedded pressure on the region which relied heavily on exporting export markets over the years. There was general a decrease in government revenues and worsening of balance of payments to almost all adjusting countries due to rising trade imbalance. As a result, they needed to borrow money from commercial banks and other international financial institutions to fund the growing trade deficits. This borrowing went own till most countries in the region could not afford to repay their loans obligations because of decline in national income (GDP) and it became evident when the Mexican government defaulted in 1982 (Theberge, A., 1999).The default resulted in further dramatic decline of foreign capital inflows to the region as financial institutions became reluctant to offer new loans to these economies. As the Fund’s orthodoxy belief that longer-term economic development is best promoted by market-oriented system demanded all Latin America o adopt structural economic reforms in order to access IMF financial assistance to correct the balance of payment deficits. Empirical evidence suggest that Fund’s orthodox successfully helped adjusting countries reduce their trade deficits of about $4 billion in 1981 to a surplus of nearly $40 billion by 1984(Woller, G.M and Hart, D.K, 1995). Several studies however, found a positive relation between IMF –sponsored programs and improve in balance of payment for adjusting countries (Pastor, JR.M, 1987) acknowledged an improvement in terms of trade for adjusting countries in Latin America .
Furthermore, IMF macroeconomic stabilization policies required Latin American countries to ease exchange controls to allow free movement of capital and this policy is believed to encourage foreign direct investments into the host countries. Faced with liquidity and persistence of trade deficits, the region desperately needed foreign capital to develop their economies but easing exchange control resulted in excessive capital outflow. Several countries like Venezuela, Argentina and Mexico were among the worst affected countries in some case capital outflows exceeded foreign debt during structural reforms (Pastor.M.Jr, 1990).The majority of capital outflows went to pay international creditors and Latin American citizen who transferred their assets abroad, it was estimated that, the region had almost $350 billion of stock in foreign markets while external debt was less than that in 1987. The capital flight had a negative impact on economic development to adjusting Latin American countries as excess capital outflow could trigger economic disturbances and eventually become a crisis. As countries in Latin America tried to resuscitated, they faced a formidable challenge because liberalise trade and exchange control increased the rate of capital outflows. The immediate implications were reduction in earnings and decline in income needed for economic development.
Discussions
The IMF sponsored structural adjustments appeared to have a negative impact on economic development in Latin American countries. Economic development is measured in various social-economic indicators such as per capita real GDP, better education facilities, increased in taxable bases, job creation and improves in health provisions in a country or region. Therefore, the Fund’s macroeconomic stabilization policies were intended to create economic wealth in the region for the benefit of all Latin American citizens to have access to quality life styles but the outcome was negative. The economic crisis in Latin America continued to deepen throughout the structural adjustment years a sign that might mean some of the policy prescriptions were inappropriately adopted in the region. As a result, all major social and economic indicators in the region deteriorated rapidly during the structural adjustment years. The regional GDP per capita decreased to the 1970s level, for example the decline in Peru and Argentina
Furthermore, IMF`s structural adjustments appeared to have failed to encourage the creation of formal employment in Latin America since almost all countries suffered from high unemployment during the course of structural economic reforms. The most affected countries were Chile , Colombia and Costa Rica Chile , Peru and Mexico Latin America relaxation of exchange controls at a time of economic instability so resources were transferred abroad which further exacerbated the crisis in the region. In addition to that, IMF conditionality programs discouraged all adjusting countries from importing goods in order to reduce the balance of payment deficits. Given that, the region required capital goods such as heavy machines for primary production, restricting imports might have adverse effects on regional output (GDP).
However, overall it appears as though IMF macro-economic stabilisation policies failed to promote economic development throughout years of structural adjustment programs in Latin America . The main problem is the rapidity with which IMF performance targets are to be met and loans are repaid. Given the short-term nature of the Fund’s lending activities, borrowing countries are expected to carryout dramatic economic reforms within a very short space of time (shock therapy).As a result, the IMF orthodoxy policies failed to encourage economic development in a decade of Latin America’s structural adjustments. Contrary, it took several years for industrialized economies to develop of which the process of market-oriented reforms and modernisation in developed countries did not occur over night, yet IMF`s paradigms demanded rapidity. As a result, most countries were unsuccessful to implement all policies due to higher degree of opposition .Civil unrest in capital cities across the region such as Buenos, Aries, Caracas and Santo Domingo were common throughout the 1980s (Lago, C.M, 1997) and in some case threatened democratic elected governments. In this regards, the economic reforms of 1980-1990 in Latin America brought huge social, economic and political cost to Latin American countries instead of promoting long-term economic development as perceived by the IMF`s orthodoxy paradigms. The fast shrinking real wage rates, rising unemployment and deregulations sparked sharp increase in prices of basic commodities as well as in government expenditures exacerbated/ worsened social-economic indicators in the region.
Though, the overall neo- liberal economic reforms in Latin America seemed to have worsened the economic crisis in the 1980s compared to their intended objective of promoting long-term economic development ;It must be said that IMF is not the creator of the crisis, these countries had a long history of economic instabilities because their economies depend on exports of primary production .As a result, changes in the global markets had a negative economic consequences and hence the region was prone to economic instabilities .For example the 1980s crisis was triggered by falling demand in the export market which created huge balance of payment and fiscal deficits in the region. Also Latin American governments were the main service providers of basic public services such as health care, state benefits, education and subsidies, even though the welfare system became inadequate. However, in some cases government borrowed money from banks other international financial institutions to fund public services provisions till it became clear that the region failed to repay its debt obligations after Mexico Latin America . Given the magnitude of the regional recession and falling export revenues such as expansionary public services were detrimental effects on the social security systems became too expensive to finance and virtual covered entire populations (Lago, C.M, 1997).Therefore, economic reforms in Latin America were necessary to encourage economic development but the cost of adjustment could have been by borrowing countries due to failures of implementing those IMF policies.
Conclusion
The International Monetary Fund`s macroeconomic stabilization policies in Latin America seemed to have further worsened the economic crisis in the region as can be portrayed by deterioration of major social and economic indicators in the region. For example, over a period of 10 years of regional economic reforms there were incidences of poor health, unemployment and shrinking real GDP which had a negative impact on growth and development. In addition to that some the Fund`s macroeconomic policies such as deregulation which in turn led to rising cost of consumer goods and impose direct impact on the poor and the working class. Whilst, there is no enough evidence to proving that all IMF policy prescriptions were fully implemented it seems shock therapy was not to improve regional economic development even if those reforms were necessary. In my view IMF orthodoxy policies could have been accompanied by some kind of social-democratic or rather social-liberal vision that prevailed in the Czech Republic immediately after 1989 (Lorenstein, M,1995) The Czech social-liberal model was intended to cushion the effects of the economic transformation though a range of socio-economic measures as part of preparing for neo-classical policies. Therefore, if extra measures were adopted in Latin America to cushion the cost of structural adjustments in Latin American countries, the Fund`s macroeconomic stabilization policies might have yield positive economic recovery thereby encourage economic development. There were serous omissions in the IMF policy prescriptions which range from social and political issues to prevent the Latin American crisis to reoccur and hence all economic indicators further deteriorated.
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