STABILIZATION,

ADJUSTMENT,
REFORM AND
PRIVATIZATION

Baldos, Khristine Mae

Rosario, Halley Camille
Sala, Ryiel
Terado, Luz Beverly
 WORLD BANK
➢ 1975, the World Bank established an interest
subsidy account (a "third window") for discount
loans for poorest countries facing oil price
increases.
➢ 1979 to 1983, structural adjustment loans (SALs)
comprised only 9 percent of Bank lending and
had little impact on the most highly indebted
countries.
➢ By the late 1990s, however, 85 to 90 percent of
lending was SALs, with many focused on
indebted countries undertaking structural
reforms to eliminate long-term debt problems,
although ostensibly to reduce poverty.
➢ After 1987, the World Bank group (including its soft-loan window, the
International Development Association or IDA), the IMF (Structural Adjustment,
later Poverty Reduction and Growth Facility), and bilateral donors concentrated
the SPA on low-income debt-distressed sub-Saharan Africa.
➢ The SPA increased co-financing of adjustment with other donors, and provided
greater debt relief, including cancellation of debt from aid and concessional
rescheduling for commercial debt from creditor governments.
➢ Also, the Bank created a Debt Reduction Facility for the poorest debt-distressed
countries in 1989 and joined the IMF in 1996 to set up the initiative for highly
indebted poor countries.
INTERNATIONAL
MONETARY FUND
BALANCE OF PAYMENTS
EQUILIBRIUM
➢International balance on the goods
and services balance over the
business cycle, with no undue
inflation, unemployment, tariffs, and
exchange controls.
INTERNATIONAL MONETRY FUND

CHRONIC EXTERNAL DEFICITES REQUIRE BORROWING

➢ Often from the International Monetary Fund (IMF) as the lender of last resort.
➢ A member borrowing from the IMF, in excess of the reserve tranche, agrees to
certain performance criteria, with emphasis on a long-run international balance
and price stability.
INTERNATIONAL MONETARY FUND CONDITIONALITY
➢ Conditionality involves a quid pro quo for borrowing.
➢ The borrower adopts adjustment policies to attain a viable payments position.
➢ Policies may require that the government reduce budget deficits through
increasing tax revenues and cutting back social spending, limiting credit creation,
achieving market-clearing prices, liberalizing trade, devaluing currency,
eliminating price controls, or restraining public-sector employment and wage
rates.
INTERNAL AND
EXTERNAL BALANCE
➢Internal Balance- balance or
equilibrium in the domestic
macroeconomy, including full
employment and price stability.
➢External Balance- an international
balance on goods and services balance
CRITIQUE OF THE WORLD BANK AND
IMF ADJUSTMENT PROGRAMS
➢Many LDC critics feel the IMF focuses only on demand while
ignoring productive capacity and long-term structural change.
➢These critics argue that the preceding model of two balances shows
the cost of using austerity programs--contractionary monetary and
fiscal policies--prescribed by the IMF.
➢Beginning in the 1950s, structural economists from the UN
Economic Commission for Latin America (ECLA) criticized IMF
orthodox premises that external disequilibrium was short-term,
generated by excess demand, requiring primarily contractionary
monetary and fiscal policies and currency devaluation.
 EMPIRICAL EVIDENCE
➢ A World Bank study of fifty-four LDCs receiving adjustment lending
during 1980-87 indicated that more than half of the recipients improved
their current account.
➢ IMF studies suggest that demand-restraining monetary and fiscal policies
reduce growth until the long lags associated with exchange-rate,
interest-rate, resource-allocation (such as increasing agricultural
producer prices), and other market reforms stimulate growth.
➢ Simon Commander's study finds commercial (especially export and
import-replacement) farmers, their wage labor, and traders benefiting
from exchange-rate and other adjustments. Public-sector employees,
domestic-goods producers, and informal-sector workers tend to be hurt
by adjustment.
➢ UNCTAD maintained that the economic performance of
the twelve least-developed countries with consecutive
structural adjustment programs throughout the 1980s did
not differ significantly from least-developed countries as a
whole.
➢ Another UNICEF study shows that from 1980 to 1985,
during a period of negative growth resulting from external
debt limiting social spending, child welfare deteriorated in
most of Sub-Saharan Africa; that is, rates of infant mortality,
child death, child malnutrition, primary school dropout,
illiteracy, and non-immunization all increased.
➢ Trade liberalization in the midst of stabilization, even if politically
possible, may perpetuate a government budget crisis.
➢ Mosley, Harrigan, and Toye and FAO suggest the following trade,
exchange, and capital market liberalization sequence: (1) liberalizing
imports of critical capital and other inputs, (2) devaluing domestic
currency to a competitive level, which simultaneously restraining
monetary and fiscal expansion to curb inflation and convert a nominal
devaluation to a real devaluation, (3) promoting exports through
liberalizing commodity markets, subsidies, and other schemes,
 11

➢ (4) allocating foreign exchange for maintaining and repairing

infrastructure for production increases, (5) removing controls on
internal interest rates to achieve positive real rates, and expanding
loans agencies to include farmers and small business people, (6)
reducing public sector deficits to eliminate reliance on foreign
loans at banking standards without decreasing real development
spending, and reforming agricultural marketing to spur farmers
to sell their surplus, (7) liberalizing other imports, rationalizing
the tariff structure, and removing price controls and subsidies to
the private sector, and (8) abandoning external capital-account
controls.
THE SEQUENCE OF TRADE,
EXCHANGE RATE AND
CAPITAL MARKET REFORMS
➢Immediate actions in response will not
necessarily resolve the disequilibrium
➢“One glorious burst” will result to rise in
unemployment, inflation, and capital
flight and the subsequent undermining of
adjustment programs
 LIBERALIZATION
13

SEQUENCE
Mosley, Harrigan, Toye and FAO

1. Liberalizing imports of critical capital and other

inputs
2. Devaluing domestic currency to a competitive level
3. Promoting exports through liberalizing commodity
markets, subsidies, and other schemes
4. Allocating foreign exchange for maintaining and
repairing infrastructure for production increases
 LIBERALIZATION
14

SEQUENCE
5. Removing controls on internal interest rates to
achieve positive real rates
6. Reducing public-sector deficits to eliminate reliance
on foreign loans
7. Liberalizing other imports, rationalizing the tariff
structure
8. Abandoning external capital-account controls
PUBLIC ENTERPRISES
AND THE ROLE OF
PUBLIC GOODS
➢Public Enterprises are wholly or partially
owned by the government and controlled
through public authority
➢Public Goods are the commodity or
service offered by public enterprises to
society
DEFINITION OF STATE-
OWNED ENTERPRISES

➢Also called public enterprises

common in China, Taiwan, South
Korea, and Brazil
➢Similar but different in some ways
with public enterprises
 KEY
17

CHARACTERISTICS

➢ Government is the principal owner or the

state can appoint or remove the chief
executive officer
➢ Revenue generated from producing or selling
goods or services to the public bear some
relationship to the cost
IMPORTANCE OF THE
STATE-OWNED SECTOR
➢Contributes 7 to 11% in the GDP of a
developing country
➢Generates significant revenue for the state
➢Enable the government to exercise greater
control over the sector
➢Help improve local technology and skills
or manage exposure to energy transition
risks
PERFORMANCE OF PRIVATE AND
PUBLIC ENTERPRISES
➢Efficiency
➢Employment
➢Savings
DETERMINANTS OF
PUBLIC ENTERPRISE
PERFORMANCE
➢State enterprises perform better with
competition.
➢Successful performing SOEs, have greater
managerial autonomy.
➢Government reduces (or keeps) the size of
the public sector commensurate
 21

PRIVATIZATION
Privatization refers to a range of policies including
➢(1) changing at least part of an enterprise's ownership
from the public to the private sector,
➢(2) liberalization of entry into activities previously
restricted to the public sector,
➢(3) franchising or contracting public services or
leasing public assets to the private sector.
 SOME PITFALLS OF
PRIVATIZATION
➢ Prices masked by controls inevitably rise.
➢ Skilled people are usually lacking.
➢ Government may require parastatals to
achieve social objectives.
➢ Government may want to proceed slowly.
➢ Private sector may lack the requisite business
skills and experience.
PUBLIC ENTERPRISES
AND MULTINATIONAL
CORPORATIONS
Many LDCs have viewed SOEs as a counterbalance to the
power of MNCs, especially as SOEs began moving into
markets previously dominated by MNCs. In the 1970s,
joint SOE–MNC ventures and other forms of domestic–
foreign tie-ins have become more common and MNC-
domestic private firm ventures much less common. For
some LDCs, expanding public enterprises frequently did
not reduce dependence much on MNCs.
ADJUSTMENT AND
LIBERALIZATION IN EASTERN
EUROPE, THE FORMER SOVIET
UNION, AND CHINA.
➢ Macroeconomic stabilization
➢ It is needed for every developing and transitional
countries to adjust and reform
➢ Evolution vs. Shock therapy
• Evolution takes time while the shock therapy is instant
➢ In 1993 the advisors in Poland and Russia argues for an
abrupt transition to the market.
COLLAPSE OF STATE SOCIALISM
AND PROBLEMS WITH
SUBSEQUENT ECONOMIC
REFORM IN RUSSIA
➢ In the late 1980, the state socialism fell
apart in Russia
RUSSIA’S LEGACY OF THE
SOVIET PERIOD: INITIAL
CONDITIONS IN 1991
1. Distorted Incentives and Price Signals
2. The Party and State Monopoly
3. Contradictions under Decontrol
4. Distorted Information
5. The Lack of Scarcity Prices
6. Overvalued ruble
7. Negative Real Interest Rates
8. Consumer Sectors as Buffers
9. Soft Budget Constraints
10.Inability to Collect Taxes
11.The Torn "Safety Net"
12. Poverty and Inequality
13. The Lack of Market Institutions
14. The Neglect of Services
15. The Lack of Technological Progress
16. The Military-Industrial Complex
17. Environmental Degradation
18. The Collapse of Trade among Communist Countries
19. Township and Village Enterprises (TVEs)
20. The Individual Economy
21. Industrial Reforms
➢ Lessons for LDCs from the Russian, Polish, and
Chinese Transitions to the Market
(two explanations for China's economic growth and
reform compared to Russia)
JOHN ROSS’ RULES
FOR LIBERALIZATION
POLICY
1. Decontrol prices , marketize, and privatize
2. Maintain controlled prices
3. Decontrol industrial prices when you can
provide international competition
4. Use monetary and fiscal policies
5. Liberalize foreign exchange rates
6. Provide a safety net for the poor and
unemployed