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Alleviating Poverty under Structural Adjustment: Proper policies can improve the welfare of the poor over the long run

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1987
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Tony Addison and Lionel Demery

Overseas Development Institute, London

Can adjustment programs be implemented without inflicting undue hardships on the poor? There are two responses to this question. The first response is that any attempt to tackle the poverty issue would water down an adjustment policy package. According to this view, those hurt by adjustment can only be helped through short-run compensation schemes. The longer-run implications for poverty must be left to the trickle-down effects of growth. The second, more optimistic, view is that there is potential for designing structural adjustment policies to assist in poverty alleviation. This can be achieved in two broad ways: first, by protecting the poor during the difficult transitional period, and second, by safeguarding their interests over the long run.

Adjustment policies have profound effects on the course of economic development, and on future income distribution. A strong case can be made for examining the distributive implications of adjustment policies in the longer run.

In a recent article (“The Social Costs of Adjustment” by Yukon Huang and Peter Nicholas, Finance & Development, June 1987), the short-run transitional costs of adjustment were reviewed. This article expands on this subject by tracing how adjustment policies can improve the welfare of the poor over the longer run. The study on which this article is based identified a number of cases in which concern about poverty alleviation was reflected in the design of Bank-supported adjustment programs. These examples are seen as illustrative, rather than typical, and not all these efforts fully met their goals. Moreover, the actions needed to safeguard the interest of the poor during adjustment clearly vary with the conditions within each country.

A policy framework

The key to achieving adjustment that improves prospects for the poor lies in the participation of the poor directly in the adjustment effort. In so far as they are economically active, their primary incomes (derived from productive activities) can be raised by the adjustment process. This can be approached in four ways. First, in the spirit of “redistribution with growth,” access to productive assets, such as land, irrigation and production inputs, can be improved. Second, rates of return on the assets of the poor can be raised by dismantling market distortions, raising output prices, or lowering input prices. Third, if the poor possess few productive assets other than their labor, increasing their access to employment through improvements in the operation of the labor market may be effective in raising their incomes. Such structural measures are likely to be sustained, and are to be preferred to short-run emergency employment schemes. Finally, the human capital of the poor can be protected by guaranteeing their access to health and education services through a restructuring of public sector resource allocations. Although adjustment usually imposes general fiscal restraint on government expenditures, it also provides an opportunity to review and revise fiscal priorities.

Poverty groups which cannot be drawn into the restructuring of production can only be helped by well-designed and targeted income or consumption transfers. The discipline of an adjustment program frequently requires a rigorous review of state expenditures as a prelude to better targeting of resources to the poor.

These, in principle, are the approaches that can be taken to protect the poor during an adjustment program. In practice, the emphasis will depend on which groups constitute the poor in the country concerned. If adjustment hits the rural poor hardest, especially the landless and agricultural smallholders, more emphasis should be given to enhancing access to, and returns from, productive assets. But if adverse effects are felt mainly by the urban poor (including those in the informal sector, or the “new poor” comprising retrenched public- and formal sector workers), more attention should be paid to improving the operation of labor markets in providing productive employment. It should be emphasized that we are only concerned with the effects of structural adjustment on poverty, and how these programs can reflect this concern. The effects of various other measures of poverty alleviation on the achievement of structural adjustment objectives is not dealt with here.

Access to productive assets

Improving the access of the poor to productive assets is a particularly effective strategy in agriculturally based developing countries. It can be an extremely potent force in raising the incomes of the poor and in achieving significant output gains in line with the objectives of structural adjustment. The choice of which assets to distribute (land, irrigation, credit, electricity, fertilizers, and so on) obviously depends on the specific country situation. Our illustrations concern land reform, and its place in structural adjustment programs. Land reform can be a key component of structural adjustment programs in selected countries in meeting the objectives of both poverty alleviation and productivity growth. Its main limitation is that governments are faced with enough difficult political choices during periods of adjustment, and are reluctant to take on the politically weighty challenges presented by land reform.

A measure of land reform was attempted in Thailand, under the first and second structural adjustment loans (SALs) approved by the Bank. Higher rice prices were an important element of Thailand’s adjustment program, but the government was concerned about their adverse impact on poor people in the rice-deficit North-East region. Many farmers in the North-East were illegally cultivating land designated for forestry, and the government granted some of these “right to farm” certificates as part of its adjustment program, in an effort to increase output and incomes. The effect of these certificates on productivity was disappointing, however. A recent study by the Bank concluded that the land reform did not go far enough. It did not confer full legal tenure, which would have provided poor squatter farmers the collateral needed to get access to institutional credit. However, the government is currently considering further initiatives on this issue.

The potentially beneficial effects of land reform (on both poverty alleviation and productivity) also underpin the land reform program of the Philippine government. Under its first two phases, over a million farmers and landless agricultural workers are likely to benefit from a program that is considered to be a key ingredient in the Philippine economic recovery plan. But the inclusion of land reform in structural adjustment programs is not always a popular option for member countries. Land reform was included in SAL discussions between the Bank and some other countries. But it was either not implemented subsequently, or ran into political difficulties.

Enhancing returns on assets

Bank-supported adjustment programs have frequently sought to remove distortions in product markets, in order to generate a more efficient allocation of resources. This liberalization process has inevitably changed the rates of return in different sectors of the economy, and the incomes they generate. Since previous policy interventions benefited better-off groups (especially urban entrepreneurs and traders with political influence), their removal has generally favored the poorer sections of the community. In a number of countries, especially in Sub-Saharan Africa, these progressive effects have been noticeable. In Ghana, urban incomes (on average, much higher than rural incomes) fell by 40 percent in real terms between 1980–84, while real rural incomes held steady. The urban-rural income ratio in Côte d’lvoire fell from 3.5:1 in 1980 to 2:1 in 1985. Similar trends are found in other developing countries. Rural incomes have increased relative to urban incomes in Brazil, Chile, and Mexico.

But not all farmers benefit from these price changes. Some are poorly served by infrastructure services, such as irrigation and transportation, and are not in a position to raise output in response to improved price incentives. For these farmers, adjustment can often make matters worse, since it imposes fiscal discipline on governments, and reduces available budgets for such infrastructure development. Other farmers produce commodities whose prices are not raised in the general liberalization.

If the price changes brought about by adjustment do not favor poor farmers, a number of courses of action are available. First, an assessment should be made of the potential for raising prices of commodities produced by the poor. If that is not possible, attempts should be made to encourage poor farmers to shift production into commodities with higher rates of return. Thus, for example, the poorer food-producing farmers of northern Côte d’lvoire could be encouraged to produce more cotton in line with the increased price incentives. Finally, more direct attempts can be made to raise productivity levels of poor farmers and hence their rates of return. In Zimbabwe, for example, efforts to raise incomes of poor farmers have been directed to increasing agricultural extension services in communal farming areas.

Access to employment

For labor-abundant countries, reallocating resources in accordance with comparative advantage should maximize employment in the long run. However, there are two main reasons why unemployment might increase in the short run as a result of adjustment. First, the process of resource reallocation is inevitably subject to time lags. Declining sectors (mainly nontradables) respond fairly rapidly to adverse market signals, but the expansion of tradables may take longer. With some enterprises contracting rapidly and others expanding slowly, a transitional unemployment problem is likely. This transition may be as long as five years or so before labor utilization begins to improve.

Second, if real wages cannot be reduced sufficiently, the contraction of aggregate demand as well as public-sector retrenchments will raise the level of unemployment. To the extent that macroeconomic equilibrium can be gained through structural changes, placing less reliance on demand restraint, the unemployment problem would be short-lived. In practice, governments not only find themselves dealing with the unemployment effects of their adjustment policies, but also with high unemployment rates resulting from past events and policies.

The Bolivian government has established an Emergency Social Fund which finances projects for employment generation and social assistance to help those most affected by recession and adjustment. Small-scale employment projects will account for 95 percent of the fund’s disbursements and projects are being implemented in the areas of food and export-crop production, rural infrastructure, erosion control, and municipal improvements. Social assistance projects cover low-income housing, medical and nutritional assistance and vocational training. Proposals for funding are put forward by municipalities, nongovernmental organizations, and other community organizations who then supervise the work undertaken. Aside from government finance, the scheme is supported by donor agencies, including the World Bank which has provided an IDA credit of $10 million. The fund forms an effective link between the Bank and local organizations.

In the face of severe recession in the early 1980s, unemployment in Chile peaked at 19.6 percent in 1982 (or 33.8 percent if those in emergency work programs are included). Among a number of programs of poverty alleviation (including a schools food program), the government has implemented emergency employment programs, administered by municipalities under central government financing. A major limitation of the programs is their tendency to become de facto systems of transfer payment. Even in programs where the work discipline was maintained, they tended to emphasise non-traded activities. To this extent they did not sufficently support the adjustment effort. However, stipends for this work have been low, so that they did not act as serious disincentives to counteract the resource reallocation required by adjustment. In a survey conducted by the University of Chile, 70 percent of those employed in the schemes were willing to work in another job if one were available.

When adjustment incorporates major resource transfers between sectors, a potential exists for minimizing the resulting unemployment by helping increase geographical and occupational mobility, and by providing other assistance, such as retraining schemes. In The Gambia, for example, a major program of public-sector rationalization has entailed the redundancy of about 2,600 workers. The retrenched workers are mainly unskilled or semi-skilled, and most received only small severance payments. The government has established an “adjustment clearing house” which provides credit and training to selected ex-public employees to help them establish viable enterprises.

A word of caution must be sounded about such schemes. Recipients of employment assistance are not necessarily among the poorest in the community. There is a real danger, especially in Sub-Saharan Africa, that too much attention will be given to assisting relatively better-off groups—such as retrenched civil servants—at the expense of the very poor.

Expenditures on human capital

In the process of revising their fiscal priorities, some governments have increased efforts to better direct social budgets toward the poor. This was accomplished, for example, by the Government of Indonesia during its adjustment to declining oil revenue. Its five-year plan beginning in 1984 shifted priorities of the health budget toward the poor, with community medicine, disease control and nutrition all receiving higher budget allocations. The successful primary education program, with its target of 100 percent enrollment by the fiscal year 1986–87, has enhanced the human capital of the poor.

In Brazil too, although aggregate health spending declined in real terms, more resources per capita were committed to programs benefiting the poor. Expenditure on primary health care and basic nutrition programs rose by 73 percent during 1980–83, and food distribution under nutrition programs expanded by 40 percent. The government of President José Sarney (elected in March 1985) is committed to removing inequity in the health care system. Nutrition programs have been further expanded, and services have been moved to poorer regions, especially the Northeast. But, the recent re-emergence of high inflation, and the requirement for tighter monetary and fiscal discipline, will require careful planning of future social commitments.

Income and consumption transfers

Involving the poor in supply-side adjustments that increase their productivity will raise their primary incomes. It may not be possible, however, to help some of the poor, either because they are economically inactive (mothers and children, for example) or because they are locked in low-productivity activities. In Jamaica, for instance, attempts have been made to cushion the impact of higher food prices on the poor through nutrition support. The government’s food assistance program, initiated in 1984, consists of a school feeding program, a food supplementation program for pregnant women and infants, and assistance for the very poor through a food stamps scheme. Around 500,000 children benefit from the school feeding program, 200,000 pregnant and nursing women and infants are covered, and the food stamps program is aimed at a group of 200,000 people (mainly the elderly and the unemployed). But while coverage is extensive, the assistance provided to the really needy may not be enough. It has been estimated that the value of food stamps, for example, would have to be doubled to $40 per month to guarantee an adequate nutrition intake for the target population.

Targeting nutritional programs at the poor is a difficult and, as yet, imperfect science. Clearly, better targeted nutrition support is called for—not only to aid the poor, but as a more efficient use of scarce public funds. It is usually possible to reduce general subsidies, and use the resulting savings to provide more effective interventions for the poor. Direct food assistance programs are often cost-effective. In some situations, food costs can be lowered by efficiencies in production and marketing. As argued by the Bank in its recent report, Poverty and Hunger (1986): “If the vulnerable group is small, and easily identifiable, effective government interventions can be targeted to reach them at reasonable cost.”

Conclusion

This brief review has shown that efforts have been made in various countries to help meet the needs of the poor during difficult periods of adjustment. Two principles are illustrated by these experiences. First, poverty-oriented adjustment programs can and should seek to maximize primary income-generating activities for the poor. This has the advantage of minimizing any conflict between adjustment and equity. Second, in obliging governments to reconsider the fundamentals of previous policies, adjustment can act as a catalyst in encouraging them to implement more effective poverty alleviation measures.

Programs intended to protect vulnerable groups may also help make adjustment programs politically acceptable. Our review shows that given the right policies, the conflict between adjustment and poverty alleviation need not be as severe as some suppose.

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