Problem

Faltering structural adjustment in the world economy


Experimental visualization of narrower problems
Other Names:
Inadequate economic integration
Failure to restructure economic relations between countries
Economic imbalances among countries
Retardation in economic structural adjustment
Faltering adaptation of economic agents to accelerating pace of structural change
Policy-making delays in response to accelerating structural change
Lag in results from economic restructuring
Nature:

The decade of the 1970s witnessed a retardation of structural adjustment at a time when the need for structural change was greatest owing to rapid shifts in patterns of comparative advantage, especially as regards the increased export competitiveness of a number of industrializing developing countries and a certain developed countries. In addition, the severe recession of the 1980s has had a serious impact on structural adjustment. In general, adjustment costs tend to be higher in stagnant than in fast-growing economies as, for example, the prospects of alternative employment are unlikely to be very bright for the adversely affected factors of production when growth is sluggish.

Background:

The objective of a developing country in drawing up and implementing a structural adjustment programme is, as its name implies, to "adjust" its economic structures to the changes taking place in a number of fields and in particular in the external economic environment. Consequently, the adoption of such a plan is not necessarily linked to a rescheduling of the country's external debt (e.g. Tunisia's 1987-1991 economic recovery plan was spontaneously adopted without any debt renegotiation). However, in practical terms, the adoption of a "structural adjustment programme" on terms and conditions negotiated with and approved by the International Monetary Fund (IMF) is more often than not linked to a rescheduling of debt. Until quite recently, the essential aim of structural adjustment programmes which met with IMF approval was to restore the debt-servicing capacity of the country concerned, as quickly as possible. To that end, the programmes included (and in most cases still include) the following components: (a) Devaluation of the national currency to restore "realistic" exchange rates, leading to a growth of exports and a cutback in imports; (b) A series of measures designed to bring the State's budget back into balance: cutbacks int he civil service, reduction of public investment, winding up of loss-making semi-State enterprises, etc; (c) Measures to establish "realistic pricing", in particular the winding up of State or semi-State agricultural commodity marketing bodies, the elimination of consumer subsidies (particularly those on urban consumption), etc. It is widely believed that in themselves, these measures would not have run counter to the increased participation of the country concerned int he third world's economic integration, and in certain cases might even have facilitated it (e.g. realignment of exchange rates), had it not been for the pronounced short-term approach of the programme as a whole. This obsession with the short-term not only put a brake on economic growth, but also frequently restricted, or even reduced, export capacity and exports themselves.

Incidence:

[Developing countries] In the less developed countries with a low level of industrialization, the mere integration of market through the removal of trade barriers, without substantial effort to expand production capacities through joint or harmonized programmes, has achieved very little. The real test of progress for economic integration schemes in developing countries is the extent that the member states are able to coordinate and harmonize their economic activities, most especially in those critical sectors -- transport and communications, hydroelectric power, river basins development and heavy industries -- where joint effort is the very basis of success. Such effort at coordination and harmonization also assumes that the member states are able to reconcile whatever divergences may arise from their separate pursuit of national economic policies.

 

[Least developed countries] In most of the least developed countries, the crisis in the manufacturing sector is difficult to resolve, without regional or subregional harmonization, because the sector is highly dependent on foreign factor inputs, in particular raw materials and expertise. In Africa in 1982, for example, more than $62 billion (about 47% of the region's total debt) had been spent on importing major industrial commodities which could in fact have been produced within the region. In this region the major obstacles to integration are structural rigidities, poor policy coordination, continuing external dependence and serious payments difficulties, and moving beyond market integration to the integration of production. The implication is that the scarcity of foreign exchange with which to purchase raw material inputs for industrial development will continue to give rise to widespread under-utilization of capacity or outright plant closures with undesirable consequences for output, employment and income. Furthermore, such countries are unable to develop significant inter-sectoral linkages which would increase the multiplier effect of domestic investment, reduce overall import content of domestic expenditures and enable each economic sector to contribute more significantly to economic development.

Related Problems:
External debt crisis
Related UN Sustainable Development Goals:
GOAL 3: Good Health and Well-beingGOAL 8: Decent Work and Economic GrowthGOAL 9: Industry, Innovation and InfrastructureGOAL 10: Reduced InequalityGOAL 11: Sustainable Cities and CommunitiesGOAL 16: Peace and Justice Strong Institutions
Problem Type:
F: Fuzzy exceptional problems
Date of last update
12.06.2018 – 00:38 CEST