ECONOMIC LIBERALIZATION NOTES

Structural Adjustment Programmes

Structural adjustment is a term used to describe the policy changes implemented by the International Monetary Fund (IMF) and the World Bank. Structural Adjustment Programs generally implement “free market” programs and policy. These programs include internal changes (notably privatization and deregulation) as well as external ones, especially the reduction of trade barriers.

Structural adjustment in Kenya started as early as the mid 1970s. However, initially the adjustments undertaken were not of much significance, since they mainly involved tinkering with the economy without changing it much. Thus up to the end of 1980 Kenya’s economy continued to have a plethora of chocking regulations and controls on most markets and economic activities. This resulted in economic stagnation and called for major structural adjustments to the economy. Bold adjustment measures were taken towards the end of 1980 and involved, inter alia:

Decontrol of prices in the economy- Today almost all prices in Kenya have been decontrolled. This has been part of a comprehensive economic liberalization process implemented by the Government with the support of the IMF and the World Bank.

Removal of subsidies- The Government removed subsidies on fertilizers, transport and fuels. Those on education, health care and other social services were lowered. As subsidies on most social services were lowered they were replaced with user charges under cost sharing schemes.

Devaluation and later floating of the Kenya Shilling- This was accompanied by the removal of almost all foreign exchange controls and restrictions. Kenya is now pursuing a liberal foreign exchange policy. Immediately after this the Shilling depreciated sharply, a
process similar to devaluation.

Divestiture of the Government from the private sector- The Government has embarked on a momentous programme of divesting itself from economic activities which are best undertaken by the private sector. For example, it disposed of its shares in the Kenya Airways,
Uchumi Supermarkets, HFCK, Kenya Commercial Bank and others to the general public. Retrenchment in the civil service- The Government has been laying off civil servants and other workers in state corporations. The main objective of doing this has been to reduce the wage bill and hence recurrent expenditure in order to release such resources for development expenditure. Although those laid off were compensated with ‘golden handshakes’, many of them squandered this money, thus and ended up poor and desperate.

Reduction in the budget deficit- The Government had been borrowing heavily from money markets in order to finance the shortfall between revenue and expenditure. This deficit had exploded over time to unacceptable levels as proportions of national income. Such
borrowing crowded out the private sector from the money markets. As a result private investors had limited access to loanable funds. Since the private sector is more efficient than the public sector in the use of scarce resources such as loanable funds, this denied the society the opportunity to make the best use of its resources.

The Government tried to reduce budget deficits through sharp reductions in public expenditure coupled with concerted efforts to increase revenue through better taxation policies and enhanced efficiency in the collection of revenues. Although all sectors were affected by the reduction in public expenditure, the axe fell more heavily on the social services such as education and health care. This is mainly because these two sectors have historically accounted for the lion’s share of the country’s budgetary resources.

Effects of Structural Adjustment Programmes
Adjustment has ‘social effects’, which are those extending beyond individual households to the whole society. For example, in the short run macro-economic adjustment reduces the overall level of income in the economy, which translates to lower incomes for most
households. Structural adjustment programmes have both direct and indirect effects on the political structures of an adjusting country. This is because they change the political attitudes and behavior of those who gain or lose as a result of the adjustment processes.

Adjustment programmes often have adverse administrative effects. This is because a cost-recovery programme in a country like Kenya where public sector incomes and wages are very low tends to encourage mis-appropriation of funds, bribery and general corruption.
SAPs also increase the debt burden of a country in terms of local currency. Therefore in order to service such debts funds have to be diverted from pressing administrative needs such as the police force, judiciary, courts, and so on. This reduces the capacity of the society to fight and manage crime.

In summary, structural adjustment programmes can have serious adverse social effects. They lead to increased poverty, insecurity, crime and violence. As the poor become more desperate and destitute, they easily resort to such criminal activities as looting when riots break out. This is because the poor increasingly ascribe their plight to ‘exploitation’ by the rich, especially Asians. These adverse social effects are more profound among the urban poor and the underclass.

Foreign Direct Investments
Aid and loans in the 1960s and 70s created “aid dependency” and the debt crisis in the 1980s and 90s. FDI is the best source of development finance, on the grounds, among other, that it is self-liquidating since foreign investors have to show profits for the host country as well as for themselves; and it does not lead to debt overhang. A more qualified proposition is made that “properly regulated” FDI can bring growth, jobs, technology, skills, market access and development; that its negative effects must be balanced with its good effects; or that FDI must be “sequenced”, or be subject to some kind of Tax. FDI is neither good nor bad; it all depends on how you deal with it. This view is now becoming popular in many circles, including some reformed neo-liberal economists, especially after the East Asian and Argentina crises of 1997 – 2001

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