Structural Adjustment Programs in Developing Countries

Structural Adjustment Programs in Developing Countries INTRODUCTION Development economics can be divided into two broad categories which are neoclassical economics and structuralism. The structuralist sees the world as inflexible. Change is inhibited by obstacles, bottlenecks and constraints. People find it hard to move or adapt, and resources tend to be stuck. In economic terms the supply of most things is inelastic. Such general inflexibility was thought to apply particularly to Least Development Countries. Entrepreneurs were lacking; and communication was poor, this alleged inflexibility was married to the evident fact that production structure of developing countries was very different from that of developed countries. To achieve development it had to be changed rapidly. The sturcturalist view of the world provides a reason for distrusting the price mechanism and for trying to bring about change in other ways. If supplies and demands are very inelastic large price changes are needed to achieve small quantitative adjustments. Large price changes are disturbing both directly and also because they result in changes in income distribution, if the losers are powerful they may be able to resist the change through organized industrial or political action. Structuralism primarily seeks to provide a reason for managing change through administrative action. Structural adjustment is a term that is used to explain policy that are driving change in countries Economic relationships especially the World Bank and International Monetary Fund (IMF) towards developing countries. In one way or another are among the conditionalities imposed by the international organization, thus Structural Adjustment Programs (SAPs) these are programs implemented by IMF and World Bank in what is said as helping developing countries to survive in their economic failure but with conditions to abide to. The main objective of structural adjustment programs (SAPS) is to make economic changes to Governments of developing countries but with conditions the IMF and World Bank grants loans to developing countries to make these economic changes in their Economies. Initially Structural Adjustment Programs (SAPs) was created as a method of economic recovery from the second world war (WWII) it was a mechanism for dealing with the balance of payment (BOP) problems that resulted from the second world war which its effects in world economies as there was massive economic recession of late 1970`s and 1980s by this time many developing countries were adopting socialist or command economy, therefore IMF and World Bank aim was to change these countries to the other form of economy that is change these countries to free market economy or commonly known as laissez fair it was not easy for the IMF and World Bank to change these countries as there could be resistance to change that is why the World Bank and IMF decided to implement these policies. The main tools for economic changes which the IMF and World bank were implementing consisted of major changes in countries economic, the conditions imposed in order for the developing countries to get loans included the following:- Devaluation of currencies in relation to us dollars, Cutting or removing subsidies on products and services, Price controls on consumer goods or minimum wage labor laws are often removed (Bakker 1994), Liberalization of trade and privatization of public sectors, Encouraging Least Developed Countries(LDC`S) to invite multinational companies to invest in these least developed countries(LDC`S) Political changes from single party to multiparty political system late 1980`s Those were the main changes which the World Bank and IMF were implementing towards the developing countries which I am going to explain it more later, in general I am trying to gather more information to gain confidence about the contribution of Structural Adjustment Programs (SAPs) towards these developing countries that is why Im conducting this study to assess the contributions of Structural Adjustment Programs (SAPs) towards the economy of Tanzania. At the end of this study leaders will be able to understand more about Structural Adjustment Programs(SAPs) and its contribution in the economy of least developed countries(LDC`S) especially for the case of Tanzania. 1.1 BACKGROUND OF TANZANIAN ECONOMY AND STRUCTURAL ADJUSTMENT PROGRAMS (SAPs) Tanzanian economy and Structural Adjustment Programs(SAPs) can be traced from when Tanzania got independence in 9th December 1961 when it was under the reins of late Mwl, J K Nyerere By this time Tanzania was under socialist economy, under socialist leadership from 1961 to 1985 enjoyed a peaceful socioeconomic environment however Tanzania is composed of many ethnic background but both were united by the national language of Kiswahili introduced by the late father of the national Mwl,J K Nyerere. In the late 1970`s and 1980`s there was economic failure in many developing countries especially Tanzania, making Tanzania among the poorest country in the world thus this is where IMF and World Bank started to provide conditionality to least developed countries(LDC`S) so that they can recover their economy. 1.2 ECONOMIC DEVELOPMENT BEFORE STRUCTURAL ADJUSTMENT PROGRAMS (SAPs) After independence the government of Tanzania was not prepared to control and guide the national economy as the system of control of the economy used after independence was that of the British economy. During this period the main products were law materials to Europe in consisted of the following cash crops such as sisal, cotton, coffee and tea in this period agriculture contributed more than 50% to Gross National Product (GNP) and sisal, coffee and cotton contributed about 60% to foreign exchange earnings (Taube 1992) In 1967 Tanzania implemented the Ujamaa policy of villagization by the Declaration of Arusha this program helped the villages with greater accessibility to input and output markets in our country it helped to improve the infrastructure in Tanzania such as transport system, water and energy supply together with health and education facilities. In 1978 to 1979 Tanzania went in a war with Uganda where Idd Amin Dada was Dictator in Uganda this war went off in 1979 with a lot of negative consequences to the national economy and wellbeing of Tanzanians together with the collapsing world market prices and it was this period when Tanzania was required by the IMF and World Bank to transform its economy from socialist economy (Command economy) to free market economy by trade liberalization and privatization of the public sector. Tanzania was doubtful to make this transition under the reins of late Mwl, J k Nyerere he was not ready to make this transition but because the country was in serious economic problems it started to implement the policy. Tanzania after negotiating with the IMF on a standby loan failed in 1979, due to this failure the country launched the first Self Guided National Economic survival program (NESP) in 1981 the objective of this program was conditional liberalization of the economy. In 1982 the government adopted a three year plan of SAP at first the program did not add any significant changes in the national economy. At the end of the fiscal year of 1984/85 Tanzania launched its significant economic reforms. The aim of this transformation was trade liberalization. The economic transformation consisted of some policy measures to be abided to these policy measures included the following (Taube 1992: Wenzel and Wiedemann 1989):- Prices of agricultural products were raised by 46-55 percentage, Cooperative unions for crops were formed, Depreciation of Tanzania shillings by 40 percent, Frozen government budget deficit at prior year amounts, Rise in government wages at an average of 29.9 percent, Domestic trade of food were liberalized, Elimination of subsidies both consumer price and agricultural subsidies, (Taube 1992: Wenzel and Wiedemann 1989) The own fund import scheme which allowed imports purchased with foreign currency deposited was initiated. Those measures were welcomed by international donors as the first step towards economic development, although those measures affected the economic performance with very little margin. 1.3 THE ORIGIN OF STRUCTURAL ADJUSTMENT PROGRAM IN TANZANIA FROM 1986 Structural Adjustment Programs (SAPs) started in 1986 it was welcomed by the new political leader, it is when Ali Hassan Mwinyi was a president after 24 years of the rule of Mwl Julius K Nyerere the new Government adopted a three year ERP (1987/88-1989/90, the main objective of ERP was to increase growth rate per capital income, a Gross Domestic Product (GDP) target growth of 4.5% and reduce inflation bellow 10% 1.4 TANZANIAN ECONOMY Tanzania is among the poorest countries in the world Economies in terms of per capital income. Tanzanian economy depends heavily on agriculture, which contributes more than 40% of Gross Domestic Product (GDP), provides 85% of exports, and employs 80% of the work force. Climatic conditions, however, limit cultivated crops to only 4% of the land area. Industry traditionally featured the processing of agricultural products and light consumer goods. The World Bank, the IMF, and bilateral donors have provided funds to rehabilitate Tanzanias out-of-date economic infrastructure and to alleviate poverty. Long-term growth through 2005 featured a pickup in industrial production and a substantial increase in output of minerals led by gold. Recent banking reforms have helped increase private-sector growth and investment. Continued donor assistance and solid macroeconomic policies supported a positive growth rate, despite the world recession. Tanzanian economy Through Gross Domestic Product (GDP) by the end of 2009 consist of the main three sectors namely Agriculture, industry and service sector where agriculture contributes 26.6%, industry sector contributes 22.6% and services sector contributes 50.8% to the national economy, in general service sector contributes more than any other sector in the national economy consider the following figure:- Source:-www.theodora.com/wfbcurrent/Tanzania/tanzania_economy.html 2. THE CONTRIBUTION OF STRUCTURAL ADJASTMENT PROGRAM TO THE ECONOMY OF TANZANIA Following the above explanations I will now turn my focus by discussing the contribution of Structural Adjustment Programs (SAPs) to the economy of Tanzania; the introduction of structural adjustment programs (SAPS) in Tanzania has a lot of advantages and disadvantages to the national economy. Starting with the Economic recovery program (ERP) of 1987/88-1989/90 financial year of Structural Adjustment Programs (SAPS) the following are the Advantages of structural adjustment programs (SAPS) in Tanzania. 2.1 IMPROVEMENT IN AGRICULTURE One of the objective of Structural Adjustment Programs (SAPS) in 1985/86 was to increase the output of food and export crops that is to say cash crops this was possible by improving the market structure for these crops not only this but also providing more incentives for production. Today even in the past ,agriculture is still the back born of our national economy thus improving agriculture was the only way to help Tanzanians because about 80 percent of the population of Tanzania are living in rural area where agriculture is taking place thus many Tanzanians could benefit much from this program. Initially the Gross Domestic Product (GDP) responded positively gross domestic product increased from 21.8 to 25.3 to 40.6 percent during 1990-1992. As seen on the Annual growth rate of GDP at factors costs, 1989-99 figure 2.1 below. From the above agricultural sector contributes 552 of the gross domestic product Percent, from the above figure it shows gross domestic product falls much in 1994 because of the government reduced effort to implement the structural adjustment programs(SAPs) measures following this the IMF and World Bank withdraw from supporting the government and even other donor countries refused to give grants/loans, again the country performance shows to fall down in the year 1998 this fall in economic performance was due to poor weather condition at the end of 1998 elnino rainfall lead to the destruction of peoples properties and crops as agriculture is the back born of the national economy, it lead to the poor performance thus low gross domestic product, not only agriculture was affected but even other economic activities were badly affected. 2.2 IMPROVEMENT IN INFRASTRUCTURE OF TANZANIA Early 1986 structural adjustment programs (SAPS) through Economic Recovery Program the IMF and World Bank started among other measures to improve the Tanzanian infrastructure through rehabilitation of the existing infrastructure which were inherited from the colonial government, there were need for improving these infrastructures because they were in bad conditions, and they included roads, railway, airports and harbors. The main importance of infrastructure is for fostering the economic development in our country together with making the country more accessible in all regions. Road infrastructure helps to make transport and communication so smooth in a country, making agricultural activities to grow and expand the market from rural areas to urban areas and together with making exportation of cash crops abroad so easy. As Tanzania was transforming its economies from command economy to free market economy that is privatization in place where private investors are increasingly investing in the country, infrastructure is one of the ingredients of the national economy. These infrastructure were improved in this phase from 1995-2000 and 2001-2005 Tanzania transport network have improved significantly. Today if you want to travel from any part of Tanzania you can reach without any problem this is the success of structural adjustment programs (SAPs) and the Government at large because structural adjustment programs (SAPs) cannot be able to run itself. 2.3 PROVIDING GREATER SUPPORT FOR PRIMARY EDUCATION AND BASIC HEALTH SERVICES One of the major areas which the structural adjustment programs (SAPS) contributed to the national economy was for funding for these basic needs of human beings, providing education and health services is one way of developing the nation and making the country more productive, further more is the way for preparing the country for future development. If we compare from when the country got independence, now primary education have changed a lot even the number of primary school and secondary school have increased in 1980`s we were speaking of one school in each district by those years they were known as middle schools but nowadays every ward is having at least two secondary school as from 2005 to date and a lot of primary schools approximately every village is having its primary school in Tanzania today, this is also the contribution of structural adjustment programs(SAPs). 2.4 TRADE LIBERALIZATION AND PRIVATITATION OF PUBLIC SECTORS Starting from 1985/86 among conditionalities imposed by the IMF and World Bank was to change the country economy that is change to free market economy together with privatization of public sector in Tanzania, privatization lead to many advantages some of them includes, recovery of dead industry increase national output as I remember in 1978/79 Tanzania experienced a lot of Economic problems as the country were coming from the war with Uganda. Generally the world economy was down, trade liberalization was like an incentive to attract many external and internal investors to come and invest in Tanzania indeed the number of investors increased and the national output increased too, not only that but also trade liberalization lead to removal of many trade barriers such price and market reforms, tariffs, embargoes, custom duties and other duties. Trade liberalization was preparing Tanzania and other developing countries to the system of open market where the forces of demand and supply are the only determinant of price in the market, therefore the government is not supposed to interfere in any matter, farther more, it also lead to freedom of expression which later I am going to discuss, through freedom of expression the country also lead to change in the political system from single party system to multiparty political system which I see as development. 2.5 TRANSFORMATION OF POLITICAL SYSTEM IN 1985 In 1985 Tanzania changed its political system from socialist economy to free market economy this decision come as a result of structural adjustment programs (SAPs) in order to make the economy more free from government intervention, the transformation went together with trade liberalization. The political transformation was successful in 1985 but the first election under multiparty election was in 1995 were the first president elected was Benjamin William Mkapa who were the first president to implement the Structural Adjustment Programs(SAPs) seriously than any other president. By transforming the political system it had many merits including the country performed poor the public could question about what went wrong, not only that but also it introduced in the country the rule of law and freedom of expression both of these are very important ingredients of economic development in any country, rule of law and freedom of expression are the foundation of peace and security in any country failure to have rule of law and freedom of expression it can lead to retardation in countries economic development. Thus the current economic development is a result of the peace and security 2.6 GLOBALIZATION OF THE WORLD MARKET Trade liberalization of 1980`s lead to the world market as a single market that is to say globalization is the process of making the world as a single village where through technology communication makes integration and linkage in the world market wherever you are you can be able to communicate and make business by using your mobile phone, as evidenced today many people have mobile phone, to date a lot of transactions are done using a mobile phone, including bank transactions, saving money for any emergency (Vodacom and Tigo service known as M-Pesa and Tigo Pesa). Today you can transact via mobile phone, all these are the results of Structural Adjustment Programs (SAPs) through the effort of IMF and World Bank is through liberalization which attracts foreign investors to invest in developing and developed country as a result of integrations in the world market it also lead to the growth of industrial and financial sector. At the same time Structural Adjustment Programs (SAPs) creates conditions for developed country to exploit by the process known as neo-colonialism. 3. THE NEGATIVE CONSEQUENCES OF THE STRUCTURAL ADJUSTMENT PROGRAMS (SAPs) Structural Adjustment Programs apart from having advantages it has a lot of negative consequences of which the SAPs measures and conditionalitys imposed to developing countries including Tanzania perhaps that is why our late Mwl.J K Nyerere was reluctant to implement the Structural Adjustment Programs (SAPs). Mwalimu thought about the fund and World Bank to set conditions for future financial support he saw it as infringement on Tanzania`s national sovereignty. On the other hand devaluation of currency Nyerere argued that it would be political suicide and could lead to riots in the street. The following are the negative consequences of Structural Adjustment Program (SAPs) in Tanzania today:- 3.1 REMOVAL OF INPUT SUBSIDIES Before the introduction of structural adjustment programs in Tanzania late 1970`s farm inputs were highly subsidized making these inputs available at a cheaper price and even the agricultural produce were available at low price, but after introducing structural adjustment programs in 1980`s, things changed subsidies were removed in 1984 they were not permanently eliminated but they were eliminated in phases but in 1995 subsidies were completely eliminated, soon after this elimination farm input such as fertilizers in combination with inflation lead to increase in prices and even farm produce shoot up unexpectedly. 3.2 DEPENDENCE THEOREM AND GOVERNMENT DEBT Introduction of structural adjustment programs in one way or another was the way of making least developed countries to become dependent instead of independence as seen from all these countries few African countries are independent, this is the evidence of those conditionalities imposed by the IMF through structural adjustment programs of 1986 in Tanzania. Perhaps this is a source of todays massive national debt, no country could say no to structural adjustment programs, as doing that was meaning that loosing the grants, loans and any other assistance from donor countries, thus the only way was to accept those conditionalities in order to survive from the economic problems. Generally structural adjustment programs are making conditions so that these countries are supposed to follow on the other hand it makes developing countries to have no say to developed countries. 3.3 DEVALUATION OF TANZANIAN SHILLINGS The main aim of devaluation of currency was to encourage exportation of farm production, but on the other hand devaluation of currency was affecting those farmers who were producing not for exportation and not only that but also the value of Tanzanian shillings in relation to other currency it was depreciating, the depreciation of currency has some big impacts to Tanzanians as it goes together with inflation in the country. Higher inflation in the country means harming the economy as the inflation of 1992 it caused a lot of problems to farmers as farm inputs were so high and even prices of goods and services were very high. 3.4 ELIMINATION OF GOVERNMENT CONTROL ON THE ECONOMY Structural adjustment programs through privatization of public entities to private sector lead the government to have little control of the national economy that is to say the decision about the price of goods and services are now left in the hands of the forces of demand and supply that is market mechanism to decide one of the major weakness to leave the market to decide is that the government have no power to decide on economic variables, even to control monopolies and other market failure, it does not mean that the government have no control it have control but not as much as it had during socialist economy, this is evidence that Tanzania inflation is increasing every year the government have failed to control this inflation. 4 SUMMARY AND CONCLUSION From the explanations about structural adjustment programs (SAPS) contribution to the national economy of Tanzania I can be able to draw my conclusion by saying that structural adjustment programs have contributed much to the national economy where it was able to bring up new technology in our country in Swahili we call it UTANDAWAZI was possible to come in our country as a result of trade liberalization and privatization of the public sector. Late 1980`s the country were transformed into a new political system that is multiparty political system which brought about the rule of law and freedom of expression to allow individual to freely express their views about the national development it is a good news to us Tanzanians as now we can be able to express ourselves without fear from any one unlike during single party political system today in Tanzania economic development is a result of frequent critics from opposition parties such as CHADEMA,CUF,UNDP,TLP AND NCCR MAGEUZI just to mention a few. On the other hand structural adjustment programs have contributed much in building and extending the development in social services through the Economic recovery program (ERP). It has helped to rehabilitate the countries physical infrastructure, increase the output of food and export crops, increase capacity utilization in industry by allocating scarce foreign exchange to priority sector and firms. Structural adjustment programs not only contributed to the growth of national economy but in one way or another it has some negative consequences to the national economy such negative impacts such as removal of subsidies to farm inputs, devaluation of currency in relation to us dollars both of these lead to worsening the balance of payments of our country together with increasing the inflation in Tanzania. Lastly but not least structural adjustment programs lead to our country being a dependent to developed country, hence lead to increasing the government debt even today Tanzania is having a high rate of debt to many friendly countries these are the result of structural adjustment programs, not only developing countries are dependent to developed countries but also developed countries are dependent to developing countries for raw materials such as minerals, cotton, tea and other natural resources.