Chapter

I Introduction

Author(s):
International Monetary Fund
Published Date:
May 1988
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The social implications of adjustment programs—particularly those supported by the Fund—have received increasing attention in recent years, as reflected in numerous theoretical and empirical studies.1 The effect of adjustment policies on income distribution in general, and on the living standards of the poor in particular, is important for all parties concerned. The distributional implications of Fund-supported adjustment programs may vitally influence their viability and acceptability. Implementation of adjustment measures that are perceived to be detrimental to the poor may not only jeopardize a current adjustment program but may also deter governments from embarking on such programs in the future.

At the same time, the question of the distributional implications of adjustment programs is complex. Many conceptual and practical difficulties impede definitive empirical analyses of the distributional implications of the macroeconomic objectives, targets, and policy instruments of an adjustment program, particularly as they relate to the poor. Purely macroeconomic policy instruments may affect poverty through diverse channels that cannot be readily specified. Moreover, there are many related questions. Do the short-run and longrun objectives of a program or the direct and indirect effects of program policies necessarily conflict with each other or with the distributional objectives? Are there conflicts in the realization of the equity and efficiency objectives of an adjustment program?

The implications for poverty of an adjustment program are also controversial. Fund-supported adjustment programs have been criticized for seeking excessive reduction in aggregate demand, thus resulting in an unwarranted contraction of output, employment opportunities, and living standards of poverty groups.2

Commentators have suggested that the Fund’s basic analytical framework for adjustment programs should be reformulated to reflect more adequately the specific institutional settings and circumstances of program countries.3 Others have suggested that a macroeconomic adjustment program should be used as an instrument for mitigating the adverse distributional implications of external shocks and even for improving the welfare of poverty groups.4

It is certainly true that the mitigation of the adverse distributional implications of exogenous shocks or of the economic adjustments necessitated by past, inappropriate policies has not been an explicit objective of Fund-supported programs. However, while the Fund has recognized the limits on its role in the formulation and execution of the economic policies of its member countries, it has also been aware that the relationship between external and domestic policies, including distributional policies, is central to all discussions on the use of Fund resources.5 Moreover, underlying the Fund’s approach to stabilization and adjustment has been the understanding that the restoration of sustainable economic balances is a necessary condition for the growth of output, employment, and welfare of all members of a society, including the poor. How to improve the efficiency of design of Fund-supported adjustment programs and to minimize the economic and human cost of adjustment are important issues that have always confronted the Fund, but about which public concern is now particularly acute.

The objective of this study is to examine the impact on poverty groups of the policy measures adopted under Fund-supported adjustment programs in seven countries. The study provides a more empirically oriented country framework for the issues discussed than the Fund’s earlier study, Fund-Supported Programs, Fiscal Policy, and Income Distribution (International Monetary Fund (1986)). That study analyzed the possible channels through which policies adopted in Fund-supported adjustment programs affected income distribution. The present study examines the implications for the various poverty groups of the broad objectives, targets, and policies of the programs in the specific economic settings of the countries concerned. Where obvious overall distributional changes have emerged that have significant bearing on the nonpoor, these are sometimes noted, since they may be significant in terms of both potential macroeconomic effects and an assessment of possible political consequences. However, the focus on poverty reflects concern for those groups least capable of bearing the burden of adjustment.

The study focuses on specific adjustment programs for fairly limited periods and is aimed largely at analyzing the short-run implications of the policy measures. The longer-run implications are also discussed whenever relevant, since much of the rationale for policies and many of the beneficial effects on the poor are likely to be realized over time. The study also notes any compensatory targeting measures oriented to the poor, together with their implications for the adjustment efforts and the political viability of the programs. These analyses may provide lessons for improving the design of future adjustment programs.

Section II summarizes the sample countries and programs. Section III describes the methodology used in the study. Section IV summarizes the results of the study with regard to the distributional implications of the principal macroeconomic 6 policy instruments adopted in connection with the programs. Section V examines the implications for the poor of the fiscal policy measures included in the programs. Section VI draws lessons from the study. The appendix provides summaries of the seven country studies.

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