Finance:Structural adjustment loan

Structural adjustment loan (SAL) The SAL is issued by the International Monetary Fund and the World Bank to qualified member countries that have adopted strong macroeconomic policies and structural adjustment plans. The purpose is to adjust the country ’s economic structure, improve international competitiveness, and restore its balance of payments. Concessional loans that achieve a desirable status, achieve price stability, and sustained economic growth. Here, the desired position of the balance of payments means that a state has the ability to finance its current account deficit through capital inflows, and its development prospects are commensurate with its solvency, without the need to complain about trade and balance of payments.

SAL initially financed the loan by selling gold held in trust funds and accepting donations from donor countries. Subsequent loans are based on the repayment of trust funds and interest earned. The SDR is the accounting unit of the loan, and the disbursement and repayment of the loan are in US dollars. The amount of SAL issued to a country is usually proportional to its quota in the International Monetary Fund.

From the perspective of the loan area, SAL is mainly distributed to Latin American, East Asian, South Asian, North African and Sub-Saharan African countries, including Colombia, Mexico, Turkey, Philippines, Pakistan, Nigeria, Sudan, Zimbabwe and other countries.

From the perspective of loan targets * SAL can be divided into three categories: economic growth-oriented, correction of balance of payments structural deficits, and poverty alleviation. It is worth mentioning that, with the increasing demand for structural adjustments in various countries, the boundaries between SAL and other types of loans issued by the International Monetary Fund and the World Bank have become blurred. For example, both the SAL and the Enhanced Structural Adjustment Loan (ESAF) issued by the International Monetary Fund tend to provide low-income member countries with preferential support for medium-term structural reforms, but enhanced structural adjustment loans are more supportive to promote growth and strengthen the balance of payments Status-oriented reform only. Another type of loan issued by the World Bank—sector adjustment loans differs from SAL only in that the former places more emphasis on intra-sector adjustments.

The advantages of SAL:

1. Autonomy: During the entire SAL loan process, member countries always have the initiative in policy selection. The International Monetary Fund and the World Bank are obliged to provide member countries with advice, guidance and policy building, but they have no right to replace members The country ’s arbitration guarantees the economic autonomy of the member states.

2. Flexibility. The International Monetary Fund and the World Bank have always taken flexible measures to avoid rigid lending regulations due to insufficient understanding of a country ’s situation. For example, taking into account the difficulties and uncertainties in the implementation of long-term policies by a country ’s domestic government, member countries are usually allowed to amend their adjustment plans. In the initial broad period when the demand for funds is large, the quota of a country is too low compared with its economic scale, and the adjustment plan is effective, the IMF and the World Bank are allowed to break the practice and adjust the specific Quota for loans issued by the state. ,

3. Continuity. Due to the long time required for structural adjustment, the IMF and the World Bank generally prefer to provide a series rather than a loan to ensure the periodicity and continuity of the structural adjustment plan. Therefore, the loan becomes a catalyst for obtaining additional financing. This provides a guarantee for the fundamental structural adjustment of the comprehensive measures of key departments, and avoids the possible adverse effects of the inconsistency of the project loan cycle and the pace of policy reform.

4. Thoroughness: The purpose of rooting out bad economic performance and supplemented by a series of supporting comprehensive policy measures, although this may make a country pay adjustment costs in the short term, but in the long run, it will definitely help As a country ’s economy is on track and achieving a virtuous circle, this is precisely the key to the difficulty of obtaining long-term benefits in the past, such as project loans and other forms of loans

In addition, SAL also has the advantages of long loan life, low loan interest rate, loose loan conditions, and easy negotiation. Because of this, SAL has been welcomed by many developing countries and has played a role of positive for the improvement of economic conditions in these countries.

Dispute on structural adjustment loans

They carry (often controversial) policy conditions, which have included: (see Washington Consensus).

1. Fiscal policy discipline;
2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
3. Tax reforms which broaden the tax base and lower marginal tax rates, while minimizing dead weight loss and market distortions;
4. Interest rates that are market determined and positive (but moderate) in real terms;
5. Competitive exchange rates; devaluation of currency to stimulate exports;
6. Trade liberalization – liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs; the conversion of import quotas to import tariffs;
7. Liberalization of inward foreign direct investment;
8. Privatization of state enterprises;
9. Deregulation – abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;
10. Legal security for property rights.

Criticism

Structural adjustment loans are very controversial. For criticisms, see structural adjustment.

Take South Korea after 1997 as an example. Since the loan conditions have a huge influence on the economy of the recipient countries, there are many arguments about the loan conditions. When the Asian financial crisis occurred in 1997, South Korea accepted various loan conditions while accepting the largest financial assistance in the history of the International Monetary Fund. The United States and the International Monetary Fund evaluated South Korea as one of the successful cases of the IMF's structural adjustment. They believe that South Korea has been closer to the developed countries after the IMF's structural adjustment. However, others doubt whether South Korea is a successful case of IMF structural adjustment. In the process of South Korea and the International Monetary Fund reaching an agreement, the United States played a major role in it. The US government's structural adjustment to South Korea should be based on its own interests. At present, South Korea's economic structure and financial market contain many problems, which leads to an increase in social problems in South Korea and the result of instability in South Korean society. Because the IMF is subject to the distribution of power and interests of major powers, it is difficult to implement actions with fair and objective criteria. The main reason is that the International Monetary Fund reflects the political issues of American financial hegemony and voting power to a certain extent. This has led to the request of the IMF for the aided country that may have been made while ignoring the actual situation of the aided country. It often overemphasizes market liberalization and financial market opening. In the long run, these loan conditions have brought bad results to the aided countries.

Some studies suggest that they have been "weakly associated with growth and reform did seem to reduce inflation." Others have argued, however, that "the outcomes associated with frequent structural adjustment lending are poor." Some have argued that, based on only mild improvement of growth in the 1990s from the 1980s, that the IMF should focus more on remedying management of a country's balance of payments position as originally envisaged by the IMF instead of its focusing on structural adjustments. One study pointed towards deleterious effects on countries in Latin America's democratic practices, suggesting that reforms may create an economically and politically marginalized population who views democratic government as unresponsive to its needs and thus less legitimate. However, the existence of the IMF loan itself has not led to any change away from democracy itself. Critics (often from the left) accuse such policies to be "not-so-thinly-disguised wedge[s] for capitalist interests."

Largely as a result of the experiences in Latin America, a new theory was formulated to build upon the experiences of the 1980s and the effects of IMF structural adjustment loans, called New Developmental Theory. This sought to build upon Classical Development Theory, by utilizing insights from Post-Keynesian Macroeconomics and Classical Political Economy, emphasizing the role of the necessity of export-oriented integration into the world economy toward industrialization, while also rejecting foreign indebtedness and management of balance of payments to avert recurrent crises.