BS - International Relations
Course Title: International Relations Since 1945
Topic: SAPS, IMF & PAKISTAN
491-FSS/BSIR/F17
Submitted to: Mam Asia Karim
Submitted by: Warda Asif
Department of International Relations
International Islamic University
Islamabad.
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SAPS, IMF & PAKISTAN
What are SAPS?
Structural Adjustment Policies are economic policies which 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. The impact of structural adjustment programs (SAPs) on economic, social, and
cultural rights has been a highly debated issue by international human rights commentators for
almost two decades. The late nineties saw the debate transcend academia, as protests of the
International Monetary Fund (IMF) and the World Bank (collectively, the IFIs) became
common.
When IMF did start its SAPS?
The IMF imposes conditions on every country that seeks loan. These conditions are called
‘Structural Adjustment Programmes’ (SAPs). Every time SAPs are imposed in Pakistan, the life
of poor people, workers, peasants, small farmers and small traders become more difficult and
miserable.
When the IMF started to impose SAPs on developing countries in the 1980s, the main aim was to
reduce the debt burden of these countries. But after four decades of SAPs, the debts of
developing countries bloomed to new heights. Now the IMF forces these countries to allocate
more resources to repay the existing loans and many countries obtain more loans to repay old
loans and interests.
Generally, the IMF and neoliberal economists describe the SAPs as necessary measures aimed to
reduce budget and fiscal deficits, stabilize the economy and improve macro-economic indicators.
But in reality, the most important aspect of SAPs is to ensure that a country continues to repay
older loans owed to commercial banks, governments, IMF and the World Bank. SAPs generally
force countries to devalue their currencies against the dollar; lift import and export restrictions;
balance their budgets and reduce social spending; and remove price controls and state subsidies.
As a result, SAPs often result in deep cuts in programmes like education, health and social care,
and the removal of subsidies designed to control the price of basics food stuff, energy and daily
essentials. So SAPs hurt the poor most, because they depend heavily on these services and
subsidies. SAPs have common guiding principles, based on neoliberal economic policies
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including free trade, free flow of capital, privatisation, deregulation, liberalisation; and an
efficient free market.
Every IMF programme contains four main features including economic stabilisation,
liberalisation, deregulation and privatisation. IMF conditions revolve around these four points.
Economic stabilisation means limiting fluctuations in exchange rates, inflation, and balance-of-
payments. It also includes tax increases, combined with cuts on social spending, as well as more
resources for debt repayment and fewer resources for education and health.
Despite almost four decades of Structural Adjustment Programmes, many developing countries
have not been able to pull themselves out of massive debt. Instead, their debts have arisen. SAPs
have failed to help a single country achieve economic stability and growth without increasing
unemployment, poverty, inequality, exploitation and repression. SAPs have, however, served the
interests of big business, investors and capitalist class superbly, offering them new opportunities to
exploit workers and natural resources. No country has been able to bring prosperity, stability and
better life on the basis of SAPs for its people.
The effects of neoliberal policies on people everywhere have been devastating. For the poorest
people in the world, the situation has become even more desperate. The people of Pakistan will
bear the brunt of the 13th IMF programme and the Structural Adjustment Programme. Pakistan
needs real economic reforms to change the basic colonial economic and social structure to
achieve economic growth, development and high living standards. Pakistan needs an economy
that can work for the benefit of all people instead of a few rich ones.
Impacts of SAPS on the politics, economy and society of Pakistan:
Structural adjustment programme was the major policy reform propagated by the World Bank,
mainly to back the approach to development of those countries whose economic performance
was poor. There were two major events of lasting significance in the 1980’s, which led to most
of the developing countries adopting these reforms to streamline their economies. Firstly, there
was a debt crisis, in which most of the developing countries, especially in South America,
defaulted on their loan payments, leading to a situation of stagflation. Secondly, most of the
developing countries moved away from import substitution and Keynesian models of growth
towards trade liberalisation and neo-liberal free market models of development.
The World Bank, in order to help recover the crippled economies of the developing countries,
introduced its stimulus package as structural adjustment, as these reforms were aimed at
restructuring the economy. One major condition attached to these reforms was transition towards
a market-centered economy, with a limited role of the state so that ultimately the developing
economies would become more efficient and open to trade. The countries seeking the aid
package were required to undertake a variety of reforms, mainly in the fiscal policy side of the
economy, and aid was made conditional on the level of implementation of these reforms.
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Pakistan, like many other developing countries during the 1970’s and early 80’s was faced with a
large fiscal deficit, rapid monetary expansion accelerating inflation, flagging trade, and a large
stock of external debt. To alleviate these problems, the Pakistani government looked towards
IMF for relief, and has received six adjustment loans since the 1980’s. Pakistan’s mounting fiscal
deficit as a percentage of its GDP has been a cause for concern for its economic policy makers
ever since its independence, but more so over the decade lasting from 2001-2010.
From 2001-2006, the fiscal deficit was around 3.9 per cent of the GDP, but in the latter part of
the decade it had ballooned to around 6.5 per cent of GDP in 2010. This increase in fiscal deficit
can be attributed to an increase in government expenditures more than its revenue generation,
accompanied with unjustifiable, politically motivated fiscal policy objectives of the governments
in charge. This high fiscal deficit in consecutive fiscal years has led to increased borrowing by
the government from both internal and external sources to make up for the resource gap.
Due to faulty fiscal policies, accompanied with inadequate measures taken to improve the debt
repayment capabilities by various governments over the years, Pakistan’s debt has continued to
accumulate at a considerable rate. The most damaging impact of this high fiscal deficit and ever-
increasing debt has been the continuous accrual of massive debt servicing, implying that both the
debt and debt servicing have touched unwarranted limits. This persistent fiscal deficit has
hampered the economic growth and development of the economy and led to dependence upon
international loans. As a result, international debt has exceeded its sustainability levels, and the
debt service alone has been eroding away more than 5 per cent of the country’s GDP growth per
annum.
Pakistan’s fiscal policy can thus be defined as the government’s plans for spending on current
and capital expenditure, and for borrowing to finance the deficit as in the case of most
developing countries. The aim of the SAPs was to power growth in the developing world to
bring it up to speed with the rest of the world. But so far the packages have not materialized into
sizable gains. According to Gordon, the process of restructuring has faced many problems and
can be termed as partial reform syndrome, meaning that the high growth rate remains elusive,
and there is an increasing rate of poverty with difficulty in reforming the fiscal policy, coupled
with long-term sustainability cost of these reforms. The populace of countries including Pakistan,
which adopted the reform packages in 1980’s, suffered from the negative consequences of the
SAP, especially the poor strata.
According to an empirical study using GINI indices, a measure for income distribution as an
independent variable in the model conducted by Oberdabernig, the SAPs have a negative effect
on poverty and income distribution in the short run. But in the long run, due to data limitations
and other factors effecting poverty, it is hard to estimate the impact of reform programmes on
poverty indicators.
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One of the major aims of the SAP was to limit the effect of price distortions caused by the
intervention of the state in the market through subsidies and tariffs. The subsidy was a measure
employed by the policy makers in Pakistan to give relief to the poor, especially from rising oil
and energy prices, and their removal led to rise in prices without accompanying increase in the
incomes of the poor, which led to increase in poverty rate. On the other hand, the tariffs were a
measure to protect the domestic industry against foreign competition and world prices, even
though it led to inefficiency, but their removal and opening up of the domestic markets to global
trade stunted the growth of the manufacturing sector in the country.
The removal of tariff and subsidies led to an increase in inflation, decrease in public sector
spending and increase in fiscal deficit, as a result of which it was unpopular among the masses
and had negative implications for the incumbent government. The proponents of the SAP were
unable to fathom the negative political and economic impacts on the country adopting the reform
package. Gordon, in his case study of Africa, showed some positive political side effects as well.
Firstly, the role of government was changed, leading to decentralization of its powers and
increased capacity to manage the changes being implemented in the economy through training
and by bolstering institutional capacity building. Secondly, enhancing political capacity for
policy implementation, which allowed policy makers to implement the broad-based reform
package and effectively monitor it.
Thirdly, the enhanced role of the private sector in the economy catalyzed the creation of a
vibrant civil society, which had an increased share in the policy-making decisions. Fourthly, the
markets functioned more efficiently due to development of institutional foundations. This last
point is important because according to Carmignani, the role of institutional quality is important,
especially in redistribution of income. Bad institutions increase income inequality, while
redistribution reduces income inequality; income inequality increases government instability and
government instability increases redistribution. It is a cyclical process, which implies that
institutional inefficiency has both a direct and indirect effect on inequality. Free trade was
another major condition for the recipients of aid through the SAP of the World Bank. Almost all
countries have followed a policy of import substitution in their economic history.
Developing countries, including Pakistan, mostly focused on import substitution policies to
protect their industries from the competition in global market through placing tariffs and trade
barriers. The policy makers in the developing countries realized that as their manufacturing
sector was no way near the level of the developed world, they would be at a disadvantage if they
followed a policy of free trade. But when these countries were faced with the crises of the
1980’s, they had no choice button open their markets to free trade under the various reform
packages. As most of these countries were low-income countries, their main exports comprised
of primary products and after opening up their economies they suffered economic stagnation as
their industrial sector had little room to man oeuvre in the face of extreme global competition.
Thus, many of the developing countries like Pakistan have become feeders of raw and primary
materials to the developed countries’ manufacturing sector.
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The aspect that has hindered the progress of trade development in these countries is that the
developed countries still follow protectionist policies with regard to their own industries like
manufacturing and agricultural sector, while propagating that developing countries follow
policies of free trade and free market, while providing aid packages to them through the auspices
of World Bank. There are many multi-country studies that deal with the topic on hand, but they
only present a general picture of the hypothesized relationship when differences among countries
are considerable and the quality of data also diverges considerably, it is not possible to find a
meaningful relationship among countries.
Therefore, more specific research needs to be done in the case of Pakistan in order to look into
multifaceted effect of fiscal deficit on other macroeconomic variables of the economy. Even
though, recent efforts have been made in this regard, a suitable study looking at both economic
and political elements of the fiscal deficit and how they determine the formulation of fiscal
behavior is yet to emerge. There is a dearth of research that looks at all the variables in a
complete, dynamic framework, and the previous studies do not find out the absolute and relative
contributions of each individual explanatory variable to economic growth.
Conclusion
The common assessment from all the SAPs is that the government intervention is the major
hindrance in the growth of the economy in the developing countries and government failure;
market failure is not the major impediment to development. But according to Adams,
implementing economic reform is a political act, as it changes the distribution of benefits in
society, as economic reform benefits some social groups and harms others. Thus the successful
implementation of the reforms in the developing countries rests with that social group or lobby
which carries more political weight, and which stands to benefit more from the incoming
reforms. Hence, economists are often torn between two conflicting perspectives according to
Rodrik: on the one hand, good economic policy should produce favorable outcomes and
therefore should prove also to be good politics; on the other hand, the implementation of good
economic policy is often viewed as requiring strong leadership.
An OECD study also shows that positive welfare gains can be achieved with the government and
the market working in unison, and how public sphere growth through infrastructure development
can play an important role in the economic growth, and can have positive impact on the private
sector as well. In conclusion, one can state that the performance of the government does not
depend on its size, meaning its level of interference in the economy; but rather on the policies it
implements to stimulate economic growth.
Despite all the development debates since the 1950’s, a large portion of the globe still remains
under-developed. SAPs have had far-reaching implications around the world, but it is believed to
be one of the major reasons why poverty and inequality have increased on a global scale. This is
mainly because World Bank policies have led to an increased dependency of developing
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countries on developed countries. The failure of the SAP to deliver the growth stimuli it
promised stems from the fact that its protagonists did not respect the different cultures when
prescribing the pill of structural adjustment, by seeing all countries as homogeneous. Also, there
is a double standard on the part of the developed countries, as most of them followed
protectionist policies in their quest for achieving development, their governments protected their
industries and provided public goods like health and education. But they oppose the policies of
those developing countries that try to follow the same path, and have even put stringent
conditions on the aid they give them, while at the same time commending the benefits of free
market and free trade.
The Pakistani state has the potential to change its future if it sets its priorities straight, and if it is
to succeed in promoting sustained and equitable economic growth it has to focus on the
following objectives:
Upgrading human capital resources through the continued expansion of educational and
health services, which can lead to increased efficiency of Pakistan’s workforce, and
ultimately lead to an increase in the country’s GDP.
Reduction in fiscal and foreign trade deficits through policies designed to promote
privatisation of state-owned industries (SOEs) and the expansion of export markets. This
is mainly due to the inefficient working of the SOEs, which are causing annual cost for
the economy, as the state is forced to provide them with bailout packages.
Preserving the country’s natural resources, particularly water supplies, which are being
wasted and need to be saved
Providing protection to low-income groups by designing policies in a way that does not
adversely affect them, for instance, the expansion of tax base.
If all of these objectives can be fulfilled, there may still be light at the end of the tunnel, and
hope for a better future for the Pakistani economy. There is an important role for the state to play
in the economic development, whether it is through intervention or deregulation, by providing
the necessary ingredients of human capital and stable political environment. The recent failure of
the Alan Greenspan model of an unbridled market-driven economy in the US adequately proves
the point.
