Impact of Structural Adjustment on Economic Performance


THE IMPACT OF STRUCTURAL ADJUSTMENT ON ECONOMIC PERFORMANCE
(CONTROL GROUP & BEFORE AND AFTER ANALYSES)

By
Misbah Nosheen
PhD scholar:
Federal Urdu University of Arts Science & Technology Islamabad
Lecturer in Economics: International Islamic University Islamabad.

Javed Iqbal
PhD scholar:
Federal Urdu University of Arts Science & Technology Islamabad
Research Officer: Economic Affair Division (EAD) Islamabad

ABSTRACT
Are adjustment policies helpful or hamper growth? This paper presents data on economic performance (aggregate and sectoral growth, inflation, investment and external account) for 8 countries. The data are classified on an annual basis according to the country’s policy stance in that year: weak reformers, moderate reformers and strong reformers. This approach allows both control-group and before and after analyses. The evidence suggests three hypotheses. First, countries with weak reforms have performed betterly in comparison with those that have moved to greater market orientation. Countries ranked with a policy score of 1 perform well on all indicators, other than investment growth and export growth, than those with scores of 3. Second, economic performance does not differ greatly between moderate and strong ones. But in case of inflation there is a significant difference between group 2 and group 3. The third hypothesis follows from noting that there is little difference in agricultural growth, manufacturing growth and overall growth among 3 groups. It is surprising that manufacturing growth is greater in case of weak reforms. New prescriptive ideas on reforms have tended to be realistic, emphasizing that reforms need to be modified to country circumstances.

1. INTRODUCTION
During the 1990s there were intense changes in the national policy environment in many less developed countries. These changes were mainly brought about within the framework of structural adjustment programmes guided by the International Monetary Fund and the World Bank. The process began in early 1980s with the Bank structural adjustment loans. Yet there is a question as to the economic impact of these policies: specifically do they support or hinder growth as compared with the pre reform situation?
To this end, paper presents evidence from 8 developing countries. As explained earlier data were collected on macro-economic variables and classified on an annual basis according to the country’s policy stance in that particular year.
The focus of this paper is on isolating the economic impact of economic reform. These data were used for control group comparisons and to do before and after analysis.

Section 2 begins with an overview of policy reform in developing countries before moving in Section 3 to a presentation of the results dealing with overall growth, inflation, investment and sectoral growth in agriculture and manufacturing. Section 4 concludes on the suitable design of adjustment.

2. POLICY REFORM IN DEVELOPING COUNTRIES: AN OVERVIEW
The term adjustment in the discussion of international development agencies refers to a set of economic reforms that nudge the economy toward market based development. Specifically they aim to achieve internal and external balance by reduction of the fiscal and trade deficits, trade liberalization and export expansions as opposed to import substitutions. During the last more than two decades almost all developing countries have taken steps toward economic liberalization achieving the stated policy objectives. But these changes have resulted in different outcomes. It is instructive in this context to refer to an analysis of six African countries, Engberg-Pedersen et al. (1996) who distinguish three stages of adjustment: (1) stabilisation, agricultural price reform and some trade liberalisation; (2) internal trade liberalisation, investment promotion and social dimensions of adjustment; and (3) public sector reform, beginning with the banking sector and civil service, and social expenditure rationalisation.

The experience of the 8 countries shows that there are divergences in the experiences of economic policy reforms with respect to the pre assigned target variables. The main push for reforms has begun at different times in these countries; but all of them have undertaken market based reforms during the last more than two and a half of decades. It is certainly the case that tariff reforms and agricultural price liberalization have been spearheaded the reforms; along with some change in exchange rate policy. Experience with stabilisation has not so uniform for instance, stablisation in many cases has been attempted at the outset of adjustment but not always successfully. Most frequently, it has been turned out to be more of a problem than a solution of the problem. Indeed, this unpleasant experience has forced the IMF to deemphasize this aspect to spearhead structural reforms. It is certainly the case that privatisation and public sector reform come at the tail end of the reforms and have not been carried out in all countries (especially public sector reform).

The practice of trade liberalization and market-oriented economic reform that had launched in many developing countries in early 1980s intensified in the 1990s. The reform undertaken varied in ownership and contents in different countries. The reforming countries can be divided into three groups. The first group consists of a number of countries in East Asia which continued their own dynamic industrial and trade policies initiated in 1960s. The second group includes a large number of countries, mostly in Africa and Asia, which have gone through the reform programmes designed and dictated by the IFIs. The third group comprises a number of Latin American countries that undertook economic reform since early 1980s, initially under pressure from international financial institutions. Nevertheless, in 1990s they intensified the reform process without having been necessarily under pressure of those institutions in all cases. The contents and philosophy of their reform programmes were, however, similar to those designed by the international financial institutions which in turn have been referred to as the “Washington Consensus” since the early 1990s.

Universal and uniform trade liberalization was a part of the Washington Consensus. The term Universal implies that all developing countries are to follow the same trade policy regime i.e they are required to liberalize trade and capital flows irrespective of their levels of development and industrial capacities. The term Uniform implies that all sectors and industries are to be subject to the same tariff rates i.e, preferably a zero rate, or a very low rate. Apart from trade liberalization, such reform programmes included mainly: capital account liberalization, devaluation at the early stages of reform to compensate for trade liberalization, fiscal and financial reform through contractionary macroeconomic policies such as budget cuts, increase in interest rates and privatization.

As for the timing of reform, there seems to be something of a regional pattern to it, although with significant exceptions. Asian countries began reform earlier (Sri Lanka in 1977, Bangladesh, India and Pakistan relaxed controls somewhat in the 1980s, although in all cases more intensive reform began in 1991).
“Policy scores” have been based on the degree of reform of the exchange rate, trade, price policy, finance, fiscal policy, private sector development, privatization and public sector undertaking by different countries. The score 1 is corresponding to weak reform, 2 to moderate reform and 3 to strong reform for each country. Figure 1 shows the average score across the 8 countries since 1980, giving a strong graphical evidence of the world trend towards reform. There has been a continuous increase in the average policy score, with a sharp incline in 1990 and 1991, when several countries intensified their reform efforts. It may be noted that a higher score means that it has become more market oriented; whether or not it has assured better growth and lower poverty remains to be analyzed in the present study.

Figure: 1
Average Policy Score for 8 Countries

Table: 1
Aid Per Capita ($ Per Person) by Policy Score (1980-2007)
1 2 3
Mean 10.204 8.739 8.239
Median 10.449 2.0741 3.787
Standard deviation 6.155 11.469 11.841
No of observations 19 55 150
Source: Calculated by author
Table: 2
Before and After Comparisons of Aid Per Capita ($ Per Person) (1980-2007)
Country Before reforms After reforms
Mean Median Stand Dev Mean Median Stand Dev
Argentina 2.061 1.598 1.305 3.839 2.867 2.119
Bangladesh 15.331 15.499 2.679 10.941 10.204 3.012
Brazil 1.317 1.282 0.477 1.068 1.131 0.736
Chile -0.431 -0.639 0.499 6.527 7.075 3.965
India 2.353 2.277 0.407 1.651 1.609 0.677
Pakistan 10.272 9.645 2.350 8.826 7.999 3.132
Sri Lanka 31.659 29.560 5.563 33.673 30.536 17.483
Venezuela 0.865 0.884 0.194 2.035 1.854 0.796
Source: Calculated by author
This section will often compare indicators for countries with different policy scores. Table 1 provides the example of aid per capita given to the sample countries.

Aid per capita dealings the net official development assistance (net of repayment of principal) available per person in each country receiving foreign aid. Data are specified in current U.S. dollars per person .

The averages (both mean and median) shown here have been calculated across all available observations, so a country can enter the data set up to 28 times (the data cover 1980-2007) though, of course, it will appear in a different column depending on its policy score for that year. It may be surprising that average aid is higher for 1 than for 2 and 3. This result is partly explained by the fact that bilateral conditionality came in during the 1980s, so that poor performers could still get high aid in the early part of the decade. But once conditionality started, many of the home grown reform efforts were not rewarded by the international community. Aid flows only resumed once an International Financial Institution (IFI)-backed programme was started.
Table 2 shows the before and after analysis of aid per capita. It presents more or less the same picture as shown by table 1.

3. ECONOMIC IMPACT OF ADJUSTMENT POLICIES BY KEY VARIABLES

3.1 Overview

Table 3 presents a summary of the main results from the control group analyses, which are explored in more detail below. I have suggested three hypotheses.
First, countries with weak reforms have performed better in comparison with those that have moved to greater market orientation. As compare to countries with score of 3, than with a policy score of 1 perform well on all indicators, other than investment growth and export growth.

Second, economic performance does not differ greatly between moderate reformers (score 2) and strong reformers (within score of 1) ones. But in case of inflation there is a significant difference between group 2 and group 3. This finding is partly explained by the fact that some countries which have carried out quite far-reaching reforms have seen only insignificant impact on their growth rates but a greater impact on their inflation.

The third hypothesis follows from noting that there is not much difference in agricultural growth, manufacturing growth and overall growth among 3 groups. It is not surprising but may be important that manufacturing growth is greater in case of weak reforms.

Table: 3
Summary of Control Group Analysis by Types of Reformers
(1980-2007)(Median Scores)
1 2 3
Growth 5.181 4.141 5.123
Inflation 26.536 10.726 93.801
Investment rate 18.482 21.094 21,656
Export growth 3.601 5.203 7.832
Agricultural growth 3.658 2.609 3,167
Manufacturing growth 7.033 4.661 5.259
Source: Calculated by author

3.2 Growth
The data presented in Table 3 show that growth performance has been weaker the greater the degree of reform in the control countries. Moreover, the results are the same. Countries with policy score 3 perform significantly better than moderate reformers: the t-statistic for the difference in means between 3 and 2 is 2.537 and that for 3 and 1 is 0.721. So there is no significant difference in growth performance between weak and strong reformers.
Table: 4
Control Group Analysis of Real GDP Growth by Type of
Reformers (1980 to 2007)
1 2 3
Mean 5.344 2.810 4.591
Median 5.181 4.141 5.123
Standard deviation 2.218 4.411 4.467
No of Observations 19 55 150
Source: Calculated by author

The data in Tables 3 and 4 are simple control group comparisons; we are comparing various degrees of adjustment (between different countries and different periods for the same country) without any reference to other factors. Table 5 presents a before-and-after analysis, which does control for country specific, but not other, factors. Chile is experiencing stronger growth with reform. Argentina and Venezuela have a moderate reforme growth. Brazil has declined in growth (relatively).
The South Asian countries - Bangladesh, India, Pakistan and Sri Lanka - have all maintained comparable growth rates regardless of policy stance; indeed they are lower in the case of Pakistan. In case of India, Sri Lanka and Bangladesh it has improved upon with reforms. Thus it seems that some countries have experienced growth with reform, whereas others have not.
Table: 5
Before and After Growth Performance
(Growth of Real GDP per Annum) (1980-2007)
Country Before reforms After reforms
Mean Median Stand Dev Mean Median Stand Dev
Argentina 0.026 2.212 5.346 4.076 5.836 7.639
Bangladesh 3.465 3.732 1.444 5.124 5.228 0.776
Brazil 2.954 3.600 5.042 2.207 2.439 2.357
Chile 1.350 4.737 8.127 6.116 6.352 2.860
India 5.887 5.809 1.739 6.599 7.129 2.681
Pakistan 6.646 6.538 1.665 4.751 4.847 2.377
Sri Lanka 4.350 4.814 1.553 4.946 5.362 1.918
Venezuela 0.770 0.193 3.937 2.962 3.687 7.462
Source: Calculated by author

3.3 Inflation
Stabilisation is considered a pre-requisite for growth, as high levels of inflation create uncertainty by confusing price signals. An important focus of the stabilization programme is to bring the rate of inflation under check. Most studies find that inflation has been brought down when stabilisation has been pursued. As shown in Table 3, this view is not supposed by the experience of our sample of 8 countries. Median inflation in strong reforming countries is more than three times greater than that in weak reforming ones and it is more than two times in weak reforms as compared with moderate reform ones.
The region of Latin America has a history of fiscal wastefulness, in which deficits were covered by printing money resulting in high inflation, and in extreme cases, hyperinflation or by tapping financial markets, leading to exploding debt ratios, often ending in debt crises.
Despite a fall in aid during the 1990s, inflation in Bangladesh dropped from double to single digits because of a reduction in the budget deficit resulting from a rise in tax revenue and increased foreign financing. First, there was a devaluation of the exchange rate, which was then fixed, and wage and price controls were maintained in order to ‘break inflationary expectations’. Increases in some prices however, led to a gradual appreciation and overvaluation. In the wake of further devaluation in 1993 inflation increased and can be seen to have followed closely the rate of nominal devaluation.
Table 6 represents the control group analysis of inflation. Results show that inflation has been higher as the degrees of reform proceed. Table 7 shows completely the sane picture.
Table: 6
Control Group Analysis of Inflation (CPI) by Type of
Reformers (1980 to 2007)
1 2 3
Mean 27.208 18.307 89.877
Median 26.536 10.726 93.802
Standard deviation 8.025 19.815 51.690
No of Observations 19 55 150
Source: Calculated by author
Table: 7
Before and After Comparisons of Inflation
[CPI (2000=100)] (1980-2007)
Country Before reforms After reforms
Mean Median Stand Dev Mean Median Stand Dev
Argentina 0.005 0.000 0.011 103.939 100.670 42.792
Bangladesh 41.543 41.598 12.400 97.840 97.839 26.100
Brazil 0.000 0.000 0.000 81.179 89.091 58.763
Chile 9.216 8.427 2.572 74.811 83.534 34.525
India 29.164 28.084 7.864 91.446 96.145 26.567
Pakistan 30.259 29.890 6.204 92.915 95.816 29.140
Sri Lanka 23.409 22.098 8.131 101.405 94.183 41.592
Venezuela 0.577 0.510 0.228 96.141 69.638 97.311
Source: Calculated by author

Table 7 presents before and after comparisons of inflation. It shows that all the sampling countries have experienced higher inflation after reforms. In case of Latin American countries (Argentina, Brazil and Venezuela) the condition is severe.

3.4 Investment
The role of investment in promoting economic growth has received considerable attention in many countries around the world. The link between investment and growth is well established. The early Domar-Harrod models specified investment as the key to promoting economic growth. The data from the countries studied shows that the investment rate gets higher with increased degrees of reforms. Based on both the mean and the median, the investment rate appears to be about 19 per cent in weak reformers and a little over 21 per cent in moderate reformers and this difference is insignificant as t value is 1.517. But the difference between weak and strong reformers is significant with t value 2.445. Table 9 shows a really very mixed picture comparing before and after reforms. Bangladesh, Chile and India have significantly improved their investment growth with reforms. Argentina, Sri Lanka and Venezuela have declined in their investment growth as reform process moves on. Brazil has a slight improvement while Pakistan works with almost same investment rate from weak to strong reform process.
Table: 8
Simple Control group comparisons for investment rate
(Per cent of GNP) by Type of
Reformers (1980 to 2007)

1 2 3
Mean 19.234 20.903 21.901
Median 18.482 21.094 21.656
Standard deviation 4.032 4.164 4.532
No of observations 19 55 150
Source: Calculated by author

Table: 9
Before and after comparisons of investment rate
(per cent of GNP) (1980-2007)
Country Before reforms After reforms
Mean Median Stand Dev Mean Median Stand Dev
Argentina 20.422 19.964 2.536 18.118 18.014 3.875
Bangladesh 16.536 16.701 0.921 21.541 22.193 2.819
Brazil 20.363 21.094 2.829 21.047 21.118 1.268
Chile 15.706 13.677 5.811 23.368 22.991 2.682
India 22.222 22.410 1.743 26.544 24.777 5.438
Pakistan 18.698 18.774 0.383 17.920 17.375 1.401
Sri Lanka 25.749 23.660 4.005 25.307 25.136 2.527
Venezuela 22.430 24.425 5.258 21.246 21.485 5.817
Source: Calculated by author

3.5 External Account and Debt
Trade liberalisation measures cover exchange rate liberalisation (usually devaluation), the reform of the system of distributing foreign exchange, liberalisation of domestic factor markets, import liberalisation and moves from non-tariff restrictions towards tariffs. All these are designed to create incentives by improving the profitability of tradables relative to non-tradables, thus rewarding exporters and punishing importers.
Caballero and Pangeas (2006) calculate that for a country like Chile, with good fundamentals, hedging the probability of suffering a sudden stop the debt flow can be equivalent to a reduction in the stock of debt of 10 percentage points of GDP. However, IDB (2007) shows that the benefit of debt reduction varies by country, depending on the current stock of debt and the quality of policies and institutions. They show recent empirical estimates that have found a non-linear relationship between external debt levels and growth levels of debt appear to be beneficial for growth up to a point, and then the correlation turns negative. The problem is that estimates for this turning point range between 10 and 60% of GDP. In addition, Imbs and Ranciere (2005) find that the threshold level at which debt becomes negative for growth is higher for countries with better institutions.
To make an optimistic calculation, assume that Latin American countries are in the negative coefficient territory of the above non-linear relationship between debt and growth, so reducing debt would be beneficial – a not too unreasonable assumption, given an average level of external debt to GDP of almost 50% in 2004, excluding Argentina and Nicaragua that were above 110%. Following IDB (2007), this would mean that a 10 percentage point reduction in the debt / GDP ratio could generate a growth benefit of around 0.8 percentage points per year. However, the shakiness of this estimate cannot be stressed enough (Miguel Braun, 2007).
Table: 10
Control Group Analysis of Current Account Deficit (As percentage of GDP) by Type of Reformers (1980 to 2007)

1 2 3
Mean -2.318 -2.999 -1.594
Median -2.428 -2.791 -2.424
Standard deviation 1.337 1.984 3.457
No of Observations 19 55 150
Source: Calculated by author
Table: 11
Before and After Comparisons of Current Account Deficit
(As percentage of GDP) (1980-2007)

Country Before reforms After reforms
Mean Median Stand Dev Mean Median Stand Dev
Argentina -3.244 -2.791 1.829 -0.105 -1.703 4.068
Bangladesh -2.457 -2.428 1.502 -0.237 -0.080 1.040
Brazil -2.267 -1.981 2.600 -1.084 -0.356 2.403
Chile -9.548 -9.466 3.446 -2.357 -1.604 2.433
India -1.667 -1.822 0.549 0.037 -0.685 1.657
Pakistan -2.855 -3.331 1.261 -1.296 -2.742 3.731
Sri Lanka -7.321 -6.511 4.319 -3.443 -3.229 2.057
Venezuela 1.075 5.298 6.657 6.629 5.128 7.198
Source: Calculated by author
Analysis of the external account is made difficult by the fact that reform efforts are often accompanied by an aid inflow, which necessarily worsens the current account. Nonetheless, we find a significant improvement in the current accounts of reforming countries compared to weak reformers. These results suggest that there may have been some improvement in exports and this is indeed shown by data on export performance (Tables 12 and 13).

Table: 12
Simple Control group comparisons for Export Growth by Type of
Reformers (1980 to 2007)

1 2 3
Mean 6.229 5.886 8.281
Median 3.601 5.204 7.832
Standard deviation 10.026 10.618 7.802
No of observations 19 55 150
Source: Calculated by author

Table: 13
Before and after real export growth (1980-2007)
Country Before reforms After reforms
Mean Median Stand Dev Mean Median Stand Dev
Argentina 2.725 2.583 9.524 8.246 7.647 7.088
Bangladesh 7.167 7.899 9.510 11.655 13.222 8.506
Brazil 11.088 14.332 12.912 8.160 9.250 5.626
Chile 3.476 4.716 8.498 8.801 8.148 3.512
India 5.933 7.250 6.108 13.251 13.782 9.987
Pakistan 9.789 11.990 13.201 7.765 7.573 11.317
Sri Lanka 5.954 4.999 3.359 6.638 6.263 5.307
Venezuela -0.850 -3.101 10.175 2.664 5.754 8.857
Source: Calculated by author

Exports analysis of average real export growth across the 8 countries since 1980 given in Table 12 shows that export growth performance is significantly stronger the greater the degree of reform across the sample as a whole. The t-statistic at the 20 per cent level for the difference in means between 2 and 3 is 1.75 but that for 1 and 2 is 0.123. The country-specific comparisons of export growth in periods of before and after comparisions, gives a clear picture. For 6 of the countries (Argentina, Bangladesh, Chile, India, Sri Lanka and Venezuela) export growth appears to be greater during periods of after reform than during before reform. India's main success in trade reform has been in the area of tariffs. In 1990-91, the unweighted average tariff was 125 per cent. That figure came down to 71 percent in 1993-94. The peak tariff rate in 1990 was an unbelievably high 355 percent. The peak rate in 1993-94 came down to 85 per cent. In 1995 the highest rate of tariff was further reduced to 50 percent and it was only 18 percent in 2004. Moreover Export promotion schemes are also being pursued with more than usual vigor.
Only Brazil and Pakistan exhibit Weak export growth rates during periods of strong reform than when reform is not being adopted.
A main argument of this review is that the control regime resulted in bad performance, but while the evidence that market-based reform is the best alternative is sufficient, this is so in relation to export performance. Control group analyses - e.g. Adjustment in Africa (World Bank 1994) and Kirkpatrick and Weiss (1995) - find that countries engaging in macro-economic policy reform, and in particular trade liberalisation, experience faster growth in real exports. And these simple control-group analyses can in fact adequately control for other factors, and so the results can clearly demonstrate the positive impact of reforms. The case studies also find positive effects. Husain and Faruqee (1994) report strong export growth in the case studies in the companion volume, despite declining terms of trade, and all but Burundi have achieved some success in diversification. On the other hand, Sahn et al. (1994) find mixed results from the case studies where reforms have been implemented.
On the other hand the picture is far less positive with respect to debt, the debt burden having increased in many countries. Large aid inflows have tended to increase the debt burden rather than reduce it; although bilateral aid is virtually all grant aid, the substantial inflows from the international financial institutions are not. Table 14 shows that the total debt burden has risen in all countries.
Table: 14
Total long-term debt
(Period average, US$ billions)

1980-84 1985-89 1990-94 1995-99 2000-04 2005-06
Argentina 27.8992 48.2506 52.7302 91.8722 122.336 78.28317
Bangladesh 4.20178 8.40382 12.926 14.9476 16.7164 18.09767
Brazil 74.053 97.0186 104.9232 170.548 189.608 158.4533
Chile 13.5523 16.7214 15.7376 23.9212 34.4018 38.785
India 21.941 46.7864 81.2144 89.6896 103.394 116.935
Pakistan 9.2423 12.9838 19.9136 27.2814 30.619 30.72017
Sri Lanka 1.83248 3.8743 5.9005 7.71406 8.90006 10.27893
Venezuela 19.54 29.6404 29.4056 31.5568 30.751 34.592
Source: World Development Indicators

4 Economic Impact of Adjustment Policies: By Key Sectors
4.1 Agricultural Supply Response
Economic performance at the sectoral level, particularly in agriculture and industry, is crucial to success of the economy in coping with changing economic circumstances brought about by macro-economic reform. There is also a gender aspect to this analysis since in many low-income countries, particularly in South Asia, women are responsible for the vast majority of agricultural labour. The impact of adjustment policies on agriculture is therefore an issue of great importance for gender relations and a proper analysis and appreciation of gender relations should inform the design of agricultural policy. Historically, developing countries have tended to tax their agricultural sectors through trade and pricing policies, often to keep food prices low for the benefit of the urban population and to generate export tax revenue. Schiff and Valdes (1992) have shown that these policies have resulted in a slowdown in agricultural sector growth and in overall economic growth, with industrial and macro-economic policies often having a greater impact than more direct, sector-specific measures.
Table: 15
Average growth of real agricultural value added by Type of
Reformers (1980 to 2007)

1 2 3
Mean 3.894 2.658 3.339
Median 3.658 2.608 3.166
Standard deviation 4.171 4.707 4.179
No of Observations 19 55 150
Source: Calculated by author

One of the objectives behind adjustment is to reduce the level of indirect taxation of agriculture through trade liberalisation and removing price controls. The success or failure of orthodox adjustment programmes could be said to center on the supply response of agriculture to adjustment measures given the significance of agriculture in these economies for exports, domestic food supply and hence for inflation. Measures such as currency devaluation, reduced export taxes and lower input prices (through reduced domestic industrial protection, although a countervailing effect can come from the removal of subsidies) have attempted to increase the relative prices and profitability of agricultural and other tradable goods.
Table 15 gives an analysis of average growth of real agricultural value added across the countries. From the results shown, it is evident that there is no significant difference in growth rates between weak reform, moderate and strong reform periods. Looking at the country specific results in Table 16 Brazil, India, Pakistan, Sri Lanka and, Venezuela exhibit strongest growth rates in real agricultural value added during periods of before reform. For Argentina, Bangladesh and Chile the strongest the reform implementation the greatest the rate of growth.
Table: 16
Before and after comparisons of growth of real
agricultural value added (1980-2007)
Country Before reforms After reforms
Mean Median Stand Dev Mean Median Stand Dev
Argentina 0.973 0.167 4.068 3.052 4.097 4.846
Bangladesh 2.322 1.013 3.018 2.891 2.530 1.932
Brazil 4.175 3.370 7.055 3.263 4.100 2.763
Chile 2.292 3.786 4.110 5.286 6.248 4.944
India 4.396 1.483 5.801 2.698 2.448 4.551
Pakistan 4.303 4.405 3.841 3.901 4.567 4.170
Sri Lanka 2.925 2.629 4.348 1.339 1.900 2.608
Venezuela 3.631 3.976 3.948 2.715 2.022 5.282
Source: Calculated by author

4.2 Manufacturing Performance under Adjustment

Pre-adjustment policies gave support to a heavily protected manufacturing sector, much of which was in state hands, through heavy tariffs, sometimes so high as to allow the firm a domestic monopoly, and both direct and implicit subsidies, such as receiving foreign exchange allocations at overvalued exchange rates. In general, state-owned firms faced a soft budget constraint.
As adjustment is about achieving a more efficient allocation of resources, the process should entail moving resources out of such activities, i.e. a reduction of output and employment.

Table: 17
Control group comparison of policy impact
on manufacturing growth by Type of
Reformers (1980 to 2007)

1 2 3
Mean 6.436 3.266 18462.
Median 7.033 4.662 5.258
Standard deviation 3.727 6.385 226066.5

No of Observations 19 55 150
Source: Calculated by author

The results of the analysis are presented in Tables 17 and 18. Table 17 reports the simple mean and median values of manufacturing growth in the countries using the classification by policy episodes described earlier. At first glance these results appear to lend support to the view that market-based reforms in fact have has a negative impact on manufacturing growth.
A more mixed picture emerges from the country-level before and after analysis in Table 18. Countries with a positive message: Bangladesh (where growth has come from liberalization permitting rapid growth in textiles, rather than successful restructuring of the old state owned sector), Sri Lanka be added to this list, having had high growth throughout the period, which may be characterised by an increasingly liberal regime.
It is important that the period under study is characterized by widespread trade and financial reforms in Latin America, to which the manufacturing sector responded by promoting cost reduction strategies in order to maintain some degree of competitiveness. These strategies in most cases involved cuts in employment levels, and this can cause an upward bias in the levels of labor productivity. Second, it is important to stress that there is a large degree of heterogeneity in the national experiences across the countries in the sample. In most of the cases, the shares of manufactures in GDP and exports have declined over the last two decades, in favor of agriculture (Argentina) or mining/oil (Venezuela). In some countries the patterns of specialization remained fairly stable.

Table: 18
Before and After Comparisons of Manufacturing Growth (1980-2007)
Country Before reforms After reforms
Mean Median Stand Dev Mean Median Stand Dev
Argentina -1.144 -2.685 7.593 2.758 4.645 8.307
Bangladesh 4.667 4.373 2.985 10.941 10.204 3.012
Brazil 1.783 0.946 7.451 145724.200 1.700 635193.000
Chile 0.127 3.096 12.132 4.958 5.241 3.565
India 6.942 6.959 3.060 1.651 1.609 0.677
Pakistan 8.400 7.885 2.649 8.826 7.999 3.132
Sri Lanka 5.714 5.184 3.432 33.673 30.536 17.483
Venezuela 2.323 3.432 3.998 2.035 1.854 0.796

Source: Calculated by author

In several countries (Bangladesh and Sri Lanka) industrial growth has been partly based on the creation of new enterprises in more labor intensive sectors rather than successful restructuring of existing enterprises, though there has been some of that in the Sri Lankan case.
4. CONCLUDING REMARKS
In this paper market-oriented policy reform has taken place in the 8 countries under consideration. Have these changes had beneficial effects on economic performance is the question to be investigated in this paper? For a very large number of indicators reviewed, performance has been better in reforming economies in some cases while it is unsatisfactory in others. Although there are deficiencies in both control-group and before and after analysis, these results are both strong and consistent, suggesting that there is something going on here. But care must be exercised in deciding what that something is.
This paper has a few important findings to report. First, in spite of problems of implementation, many less developed countries of South Asia and Latin America have undertaken significant policy reforms during the 1990s, particularly trade liberalization, pricing and marketing reform, and the creation of a policy regime favorable to foreign direct investment. The national policy environment at the end of the 1990s in many less developed countries is thus very different from maintaining a given level of net transfers to a country involved high transaction costs associated with the continual negotiation of the proportion of scheduled debt payments to be serviced from the country’s own resources that at the end of the 1980s. It has moved decisively in the direction of economic liberalization.
Second the impact of economic reforms in South Asia on the policy environment presents a mixed picture. The industrial and trade policy reforms have gone far, though they need to be supplemented by labor market reforms which are a critical missing link. The logic of liberalization also needs to be extended to agriculture, where numerous restrictions remain in place. Reforms aimed at encouraging private investment in infrastructure have worked in some areas but not in others. The complexity of the problems in this area has been underestimated, especially in the power sector. This has now been recognized and policies are being reshaped accordingly. Progress has been made in several areas of financial sector reforms, though some of the critical issues relating to government ownership of the banks remain to be addressed. However, the outcome in the fiscal area shows a worse situation at the date than at the start.
Thirdly, our results would also support a case for more extensive structural and institutional reforms that is, for broadening the scope of reform because pushing macroeconomic reforms to the levels of performance achieved in the faster- growing.
The policy debates triggered by the crises and lagging economic performance in Latin America have not produced a clear “winner,” much less a new consensus. In this regard, they differ from the debates of the 1980s, which led to the “Washington consensus,” a set of policy prescriptions that was widely supported by policymakers and economists both in the region and outside.
Most economists and policymakers including many that continue to believe that stabilization and liberalization were the right policy prescriptions in the 1980s and early 1990s will now take the view that the “Washington consensus” agenda needs to be either augmented or replaced.
Finally, new prescriptive ideas on reforms have tended to be realistic, emphasizing that reforms need to be modified to country circumstances. For example, the work on “Politics of Policies” sponsored by the Inter-American Development Bank starts with the premise that weak institutions are a common problem in Latin America, but argues that the solutions might be quite different across countries, depending on the “political game” that is currently in place. In the same vein, Hausmann, Rodrik, and Velasco’s (2005) “growth diagnostics” approach argues that the binding constraints to growth in Latin America might be completely different across countries, and that the key to successful reforms lies in correctly identifying this constraint on a case-by-case basis.

REFERENCES
o Beinefeld, M., 1995, Structural Adjustment and Tanzania's Peasantry: assessing the likely long-term impact, pp88-130 in Jamal 1995
o Bhaduri, A. and Skarstein R., 1996, ‘Short-Period Macro-economic Aspects of Foreign Aid’, Cambridge Journal of Economics, Vol 20 No 2: 195-206
o Bryceson, D., 1999, ‘African Rural Labour, Income Diversification and Livelihood Approaches: a long term development perspective’, Review of African Political Economy, Vol 80: 171-89
o Bryceson, D., Kaye, C. and Mooij, J. (eds), 1999, Disappearing Peasantries? Rural Labour in Africa, Asia and Latin America, London: Intermediate Technology Publications
o Caballero, Ricardo and Stavros Panageas (2006), “Hedging Sudden Stops and Precautionary Contractions,” Journal of Development Economics, August.
o Calvo, Guillermo and Ernesto Talvi (2005), “Sudden Stop, Financial Factors and Economic Collapse in Latin America: Learning From Argentina and Chile,” NBER Working Paper 11153.
o Easterly, W. and Levine, R., 1997, ‘Africa’s Growth Tragedy: Policies and Ethnic Divisions’, Quarterly Journal of Economics, Vol CXII No 4: 1,203-50
o Easterly, W. and Rebelo, S., 1993, ‘Fiscal Policy and Economic Growth: An Empirical Investigation’, Journal of Monetary Economics, Vol 32 No 3: 417-58
o Economist Intelligence Unit, 1999a, Country Profile Guinea-Bissau 1998/1999, London: EIU 1999b, Country Profile Eritrea, Somalia, Djibouti 1998/1999, London: EIU 1999c, Country Profile Sri Lanka 1998/1999, London: EIU 1999d, Country Profile Kenya 1998/1999, London: EIU
o Eichengreen, Barry, and Ricardo Hausmann, eds. (2005) Other People's Money: Debt Denomination and Financial Instability in Emerging Market Economies. Chicago: University of Chicago Press.
o Engberg-Pedersen, P., Gibbon, P., Raikes, P. and Udholt, L. (eds), 1996, Limits of Adjustment in Africa, Oxford: James Currey / Portsmouth: Heinemann: 141-214
o Goldstein, M. and Montiel, P., 1986, ‘Evaluating Fund Stabilisation Programmes with multicountry data: some methodological pitfalls’, IMF Staff Papers, Vol 32 No 2: 304-44
o Guhan, S. and Nagaraj, K., 1995, ‘Adjustment, Employment and Equity in India’, Employment Papers 4, Geneva: International Labour Office Employment Department
o Hanmer, L., Pyatt, G. and White, H., 1999, ‘What do the World Bank’s Poverty Assessments teach us about poverty in sub-Saharan Africa?’, Development and Change, Vol 30 No 4: 795-823
o Horton, S., Kanbur, R. and Mazumdar, D., 1994, Labor markets in an Era of Adjustment, Washington, D.C.: Economic Development Institute
o Husain, I. and Faruqee, R., 1994, ‘Adjustment in Seven African countries’, in I. Husain and R. Faruqee (eds), 1994, Adjustment in Africa: lessons from country case studies, Washington, D.C.: World Bank: 1-10
o Imbs, Jean M., and Romain Rancière. (2005), “The Overhang Hangover,” Policy Research Working Paper no. 3673, World Bank, Washington, DC.
o Jamal, V., 1995, Structural Adjustment and Rural Labour Markets in Africa, London: Macmillan Press
o Kanji, N., 1995, ‘Gender, Poverty and Economic Adjustment in Harare, Zimbabwe’, Environment and Urbanisation, Vol 7 No 1: 37-54
o Killick, T., 1995, ‘Structural Adjustment and Poverty Alleviation: an interpretative survey’, Development and Change, Vol 26 No 2: 305-31 1999, ‘Making Adjustment Work for the Poor’, ODI Poverty Briefing No 5 May 1999, London: Overseas Development Institute
o Krishnan P., Selassie, T.G. and Dercon, S., 1998, The Urban Labour Market During Structural Adjustment: Ethiopia 1990–1997, DPS 98.17, Université Catholique de Louvain: Center for Economic Studies
o Lall, S., 1995, ‘Structural Adjustment and African Industry’, World Development, Vol 23 No 12: 2,019–31
o Levine, R. and Zervos, S., 1993, ‘What Have We Learned about Policy and Growth from Cross- Country Regressions?’, American Economic Review Papers and Proceedings, Vol 83 No 2: 426-30
o Matin, K. and Wasow, B., 1992, ‘Adjustment and Private Investment in Kenya’, IBRD Policy Research Working Papers No 878, Washington DC: World Bank
o Mosley, P., Harrigan, J. and Toye, J., 1991, Aid and Power: the World Bank and policy-based lending, Vol I, London: Routledge
o Otani, I. and Villanueva, D., 1990, ‘Long Term Growth in Developing Countries and its Determinants: an empirical analysis’, World Development, Vol 18 No 6: 769-83
o Rodrik D., 1999, ‘The New Global Economy and Developing Countries: making openness work’,Overseas Development Council Policy Essay No 24, Washington, D.C.: Johns Hopkins University Press for the Overseas Development Council
o Roemer, D., 1996, Advanced Macro-economics, New York: McGraw Hill
o Sahn, D., Dorosh, P. and Younger, S., 1994, ‘Economic Reform in Africa: a foundation for poverty alleviation’, Cornell Food and Nutrition Policy Program Working Paper No 72, Ithaca: Cornell Food and Nutrition Policy Program
o Sala-i-Martin, X., 1997, ‘I Just Ran Two Million Regressions’, American Economic Review Papers and Proceedings, Vol 87 No 2: 178-83
o Savvides, A., 1995, ‘Economic Growth in Africa’, World Development, Vol 23 No 3: 449-58
o Schiff, M. and Valdes, A., 1992, The political economy of agricultural price intervention in Latin America, San Francisco: International Center for Economic Growth ICS Press
o Stewart, F., 1994, ‘Are Short-term Policies Consistent with Long-term Development Needs in Africa?’ in Cornia and Helleiner (1994): 98-128
o Stiglitz, J., 1998, Towards a New Paradigm for Development: strategies, policies and processes, 1998 Prebisch Lecture, mimeo
o Toye, J., 1994, ‘Structural Adjustment: context, assumptions, origin and diversity’ in R. van der Hoeven and F. van der Kraaij, Structural Adjustment and Beyond in sub-Saharan Africa, London: James Currey Ltd
o Williams, G., 1994, ‘Why Structural Adjustment is Necessary and Why Doesn’t it Work?’, Review of African Political Economy, Vol 60 No 21: 214-25
o World Bank, 1994, Adjustment in Africa: reforms, results and the road ahead, Oxford: Oxford University Press, for the World Bank 1995, Strengthening the Effectiveness of Aid: lessons for donors, Washington, D.C.: World Bank
o World Bank World Development Indicators, 2007, CD-Rom, Washington, D.C.: World Bank

Tags
Related Essays Economics