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Nutrition and economic adjustment

Editorial introduction
Macroeconomic adjustment policies and income distribution: the macroeconomic relationships
Recession, adjustment, and nutrition: an overview
Famines, food, and nutrition: issues and opportunities for policy and research
The impact of macroeconomic adjustments on living standards in the Philippines
Poverty and malnutrition consequences of structural adjustment: World Bank policy
Macroeconomic adjustments, agricultural performance, and income distribution in Brazil since
Macroeconomic adjustment policies and human nutrition: available evidence and research needs
Statement by the managing director of the International Monetary Fund
Statement by the sub-committee on nutrition to the United Nations administrative committee on co-ordination

Editorial introduction

The article by Reutlinger beginning on page 50 reviews the evolution of the World Bank's experience with policies to eliminate poverty through development and its current view of the effect of adjustment policies on the welfare of the poor. There were originally expectations that the benefits of development would trickle down to the poor and more recently that development policies could be designed to benefit the poor more directly. The assertion is made that the effects of structural adjustment operations that result in food price increases can be offset by other measures supported by the Bank that will mitigate the consequences and help the poor to weather structural adjustments.

As other articles in this special issue indicate, however, the problem is that the adjustment policies result in higher prices for food and lower real wages, while formidable administrative obstacles usually block the implementation of measures to moderate their effects on the poor. The examples cited by Reutlinger do not provide convincing evidence to the contrary, although they indicate a significant effort.

The statements by the Director of the International Monetary Fund (IMP) on page 87 suggest that the IMP would be responsive to innovative proposals to effect economic adjustment policies without worsening poverty or malnutrition. Nevertheless, discussion at the March 1987 meeting of the ACC Sub-committee on Nutrition revealed that no such country proposals have yet been made.

Letters to the editor or articles are invited that can document the actual nutritional and health consequences, either positive or negative, of economic adjustment policies supported by the International Monetary Fund and the World Bank. - N.S.


Macroeconomic adjustment policies and income distribution: the macroeconomic relationships

Jean-Jacques Dethier
International Food Policy Research Institute, Washington, D.C., USA


A typical developing country faces balance-of-payments difficulties, accelerating inflation, high food prices, corruption and mismanagement of public enterprises, speculation in the private sector, destabilizing demands for wage increases by workers, and a visible increase of poverty. Often political tension and racial strife make domestic resolutions of conflict difficult. This is compounded by sudden reluctance on the part of foreign commercial banks to increase their lending as well as strings attached to bilateral loans and political pressures exerted by the superpowers.

Under such difficult circumstances, governments are required to take strong measures to stabilize the economy externally and internally. These policy measures imply hard political and economic choices. Stabilization policies come as a package, and the sum of their effects over time and the dynamic path of the adjustments have to be monitored at every step.

Several issues must be considered by policy-makers before the measures are implemented. Is a shock treatment preferable to gradualism? What is the appropriate timing to introduce specific measures so that they do not have effects that cancel each other out or make the situation worse than before the shock? Finally, what consideration should be given to the welfare of specific population groups, in the form of measures counteracting the adverse impact of the adjustments on these groups?

Stabilization policies in developing countries are applied when there is an imbalance between aggregate income and aggregate expenditures in the economy, as reflected in the deficit of the current account of the balance of payments. The total amount of income generated by factors of production in the economy or borrowed abroad is not sufficient to cover the expenditures incurred.

The country enters a crisis when the relationship between income and expenditures is not viable in the short run, in the sense that it cannot secure funds from abroad to finance the gap between expenditures and revenues. Whether the relationship between income and expenditure is viable at the economy-wide level therefore depends essentially on the level of foreign reserves and of foreign financing (i.e., credits and grants from abroad) available to the country.

Basic identities from national income accounts are sufficient to provide a framework of explanation. The value of output produced in the country, called gross national product, is distributed to various income recipients according to a changing pattern of income distribution. Income is received primarily in the form of wage income to urban workers, employees, farm labourers, etc.; income of small proprietors such as farmers, artisans, pedlars, and operators of small enterprises; profits to medium-size or large firms; interest paid to banks on loans; profit margins accruing to intermediaries, for example, for the import of materials imported from abroad; and taxes paid to the government. The changes in income distribution depend fundamentally on income shares and on changes in prices.

In national accounts, expenditures are classified into four broad macroeconomic aggregates: private consumption, public consumption (government current expenditures), investment, and the trade balance - exports minus imports. For the national income to equal the gross national product, only the net balance between exports and imports is to be considered, since exports represent revenues, while imports represent expenditures. Aggregate domestic expenditures are called absorption, a term including private and public consumption and investment, and meaning the total amount of real resources absorbed in the economy.

Expenditures are made on goods and services for direct use (consumer goods and intermediate goods) or for investment purposes. Investment is financed by savings, which originate from three major sources. The "savings-investment identity'' from the national accounts identifies these sources as private sector saving (income of the private sector, net of taxes, minus consumption); government saving (revenues, including taxes, less expenditures), which of course will be a deficit if public expenditures exceed revenues; and foreign saving, that is, the trade-balance deficit. An excess of imports over exports represents an inflow of capital since the country spends more than it receives, and the rest of the world makes up the difference. Viewing this equality in another way it is easy to see, for example, that the government budget deficit, as a matter of accounting, must be equal to an excess of investment over saving by the private sector (for example, in the form of financial claims on the public sector) plus an excess of imports over exports (trade-balance deficit).

In a very theoretical sense, a macroeconomic crisis implies a disequilibrium between incomes and expenditures, and therefore a change so severe that it threatens to undermine the stability of variables hitherto regarded as constants in the economic system, such as institutional structure and institutional arrangements [1]. Economists view the economy of a country as an equilibrium system - that is, an aggregation of various institutions (firms, consumers, government, etc.) united by regular interaction according to mechanisms of control, where prices (commodity prices, wages, etc.) and quantities (level of output, employment, etc.) are the adjusting variables that maintain equilibrium in the system. The mechanisms of control for the short run, or stabilization mechanisms, are either automatic (such as the price mechanism when markets work without outside intervention), legislated (as is the case in certain economies of income, and therefore of demand, when a recession sets in), or regulated by policymakers inside the country and abroad in a series of coordinated short-term decisions, called stabilization policies.

A normally functioning economy is constantly subjected to small disequilibria due to "shocks" but is stable enough to withstand those shocks, the effects of which are corrected by mechanisms of control built into the system. By contrast, when there is a crisis, the threat of impending collapse and of a breakdown in the system requires strong policy measures. A breakdown can come about because certain boundary conditions are reached in the system. The country is then faced with a structural crisis, for example, because its debt-service ratio has reached critical proportions and requires that structural adjustments take place. The debt-service ratio is the ratio of interest payments on loans contracted by the country to gross domestic product (GDP). A ratio of 30 per cent is considered in most cases to be a critical value. The GDP measures the total value of goods and services produced in the economy, and is equal to absorption plus net exports (that is, exports minus imports). By contrast, GNP (gross national product) measures the total value of income accruing to residents in the economy. If there were no trade, GNP and GDP would be equal since income would have no one to accrue to but domestic residents.

Typical structural adjustments advocated presently by international agencies such as the World Bank include providing incentives to exporters in order to generate foreign exchange to repay the debt and avoid defaulting.

A breakdown can also come about because stabilization mechanisms are such that the equilibrium of the system is not stable anymore. Instability can be the consequence of market mechanisms (for instance, in a poor agrarian country when a bad harvest leads to shortages and high prices), or it can be brought about by mismanagement (for example, excessive military spending or unproductive prestige projects of the government financed by simply borrowing from the central bank), by political tensions leading to capital flight out of the country, or by excessive wage claims by the urban working class fueling inflation. Instability can also result from exogenous shocks to the economy that are too strong for the usual corrective measures, for example, unpredictable fluctuations in the international commodity prices.

During the past decade, developing countries have been subjected to very severe external shocks. Increases in oil prices and in grain prices, world-wide inflation, high interest rates, floating exchange rates, low and unstable prices for all export commodities [2], and the interruption or reduction of commercial borrowing have put an unprecedented strain on most developing economies. The recession experienced by those economies since 1979 is the most severe since the Second World War. Average growth rates of output have been minuscule during 1979-1983. The performance was particularly bleak in 1983, above all in Africa and Latin America [3].

The impact of the deterioration in the terms of trade, of the reduced foreign demand for exports, and of international interest rate increases will be felt in the short run and in the long run. External shocks directly affect national income by reducing demand, both demand for exports and domestic demand, and indirectly by reducing output below the capacity of the economy to produce because it is dependent on imported inputs for the purchase of which no foreign exchange is available.

"Normal" corrective measures therefore require foreign financing, and commercial banks are now reluctant to increase their lending to developing countries. There are some mechanisms in the international economy that enable governments to bridge the gap temporarily, but no internationally agreed-upon mechanism considers the case of permanent balance-of-payments difficulties. In this case, only painful adjustments can solve the problem [4]. Symptomatically enough, in the North-South world system, international mechanisms always require the countries suffering from balance-of-payments deficits to operate the adjustments in their economies. The deficit of the South has its counterpart in the surplus of the North. In industrialized countries, which enjoy much higher standards of living, adjustments would be much less painful than in developing nations.

The intervention of international lending agencies is predicated on whether the shock is of a temporary or of a permanent nature. If the shock resulting in balance-of-payments difficulties is temporary, so that sufficient external resources make it possible to keep both real consumption and real investment at their pre-shock level, there is traditionally a case for the International Monetary Fund (IMF) to make those resources available to the country until the situation reverses itself. If the shock permanently affects the terms on which the country interacts with the international economy, there is no presumption that finance will be automatically made available to ease the effects of these shocks. There are resources on which countries in difficulty can lay claim, for instance at the IMF [5], but the rule here is not automaticity but conditionality. The approval of the loan is made conditional upon the acceptance by the country of a stabilization programme to operate adjustments in the domestic economy, negotiated between the IMF staff and the economic policy team of the country, called a stand-by agreement.

Adjustments are required if previous projections concerning consumption, investment, and income level are to be realized in the medium to long run.

The IMF has acquired a crucial role in developing countries not so much because of the actual amount of assistance involved but because of the conditions attached to it. Therefore its analytical approach and doctrine have acquired a particular significance. The traditional assumption is that a Fund programme will underpin the country's creditworthiness [6] and encourage commercial banks and governments of industrialized countries to lend additional funds to the country. Even when the Fund is not involved in the measures, developing countries' policy-makers usually adopt policies that would have obtained its approval [5] or try to obtain its tacit support.

The policies advocated by the Fund (and by other representatives of orthodoxy) are strongly monetarist. Fund economists rarely diverge from the monetarist model when negotiating an agreement with local policy-makers or during their "financial programming" in-country exercises.

A financial programme, in the jargon of the IMF, is a set of coordinated policy measures in the monetary, fiscal, and balance-of-payments fields intended to achieve specific targets - that is, levels of macroeconomic variables - during the period of the stand-by agreement, generally one or two years. The task of setting targets, choosing policy instruments, and quantifying the appropriate magnitude of the instruments required to reach the targets is described as financial programming [7]. The underlying approach on which Fund economists base their programming is the monetary approach to the balance of payments, which since the mid 1960s has become the official doctrine of the IMF [8]. The Fund concentrates on a small number of "performance criteria" on which the successive disbursement of so-called upper credit tranches are made conditional, with overriding consideration given to the achievement of external balance. The conditions have evolved over the years [9, 10] but of late have always concentrated on a few policy prescriptions that follow logically from the monetarist model. These policies are described in the next section.


[Monetarist policy is] simply a campaign against the standard of life of the working classes [operating through] the deliberate intensification of unemployment . . . by using the weapon of economic necessity against individuals and against particular industries. [11]

Stabilization policies are neither distributionally nor politically neutral. Policy-makers always have at their disposal a vast array of instruments with which they can achieve the twin goals of restoring internal and external balance. On analytical grounds, there is nothing that justifies that one particular policy package be adopted. Rather, it is a matter of political choices and, ultimately, of the kind of society one wishes to live in: low growth but a high degree of welfare for the majority and fairly democratic institutions, or high growth rates, sharp income inequalities, and an authoritarian regime to maintain order.

The politics of stabilization is a tricky business, brilliantly described in recent papers 112, 13]. The same policy measure can give rise to quite different responses, depending on the country. Tinkering with food prices by cutting food subsidies gave rise to immediate and massive food riots in Egypt in January 1977, to widespread disturbances five months after the measures had been adopted in Morocco in January 1984, and to virtually no protest in Senegal in early 1982 and in August 1983, or in Madagascar in May 1982 and mid-1983 [14]. In Sri Lanka, where the food subsidy system was substantially transformed in 1977 in the wake of the change of government, there was no noticeable public response, but it is possible that the racial conflicts that surfaced in the 1980s are related to the distributional impact of the changes.

Depending (a) on the nature of the external shocks, (b) on the characteristics of the particular economy, and (c) on the policy response of the government, the consequences of stabilization policies can be extremely diverse. In any case they will entail social costs, in the present or in the future. Either consumption in real terms or savings in real terms, or some combination of both, must fall. Adjustments can be postponed, but their necessity is likely to surface sooner or later. A reduction in the savings rate leads to reduced growth rates of output and of national income in the future. Real investment can only be sustained if domestic savings increase or if increased external resources are available to the country, but the latter has not been the case in the first half of the 1980s. During the 1970s, some countries, such as Peru, Jamaica, and Tanzania, used external financial resources made available to them to avoid (or minimize) decreases in per capita consumption. Other countries, such as Singapore and Taiwan, accepted a temporary decline in real growth and used foreign resources in productive investment. Finally, an intermediate group of countries, including Brazil, Turkey, Portugal, Mexico, and Yugoslavia, used foreign loans to maintain the rate of growth of domestic consumption and also to channel resources into import-substituting activities [5].

Components of Orthodox Stabilization Packages

An orthodox policy package of the type advocated by the IMP will contain some or all of the following policy measures:

  1. Credit is restricted through the imposition of separate ceilings on credit from the domestic banking system to the private sector and the government (including public enterprises), leading to monetary contraction.
  2. Specific targets for the public-sector deficit usually back up such measures, sometimes with agreements about which programmes are to be cut or which revenue sources are to be increased so that the deficit targets can be attained.
  3. Government intervention in the price system is reduced or abolished, and in particular consumer food subsidies are eliminated [10].
  4. Price liberalization is often accompanied by measures meant to contain cost increases. Freezing of wage demands is often recommended to cut inflationary pressures and "perhaps shift the income distribution toward high-saving profit recipients and the upper middle class" [15].
  5. The currency is depreciated; either through explicit devaluation or through equivalent measures such as cuts in quotas, higher prior deposits for imports, subsidies for exports, etc., which lead to a depreciation of the effective exchange rate. Depending on the country's specific circumstances, the devaluation may be gradual over time in a series of mini-devaluations or once and for all in a maxi-devaluation. In the case of some countries, such as the southern-cone countries of Latin America, the Fund has pressed to slow the rate at which the domestic currency is devalued over time in a crawling peg, because the slower crawl is supposed to dampen expectations and be anti-inflationary.
  6. Finally, internal and external liberalization - by the removal of restrictions on external trade or capital movements, or on internal prices and transactions -- usually accompanies the set of measures described above. Internal financial reform and liberalization are often achieved through increases in interest rates. External liberalization is achieved through reduction in trade barriers and impediments to the free flow of capital.

These policies, starting from an unsustainable level of absorption, are based on a reduction in real consumption and/or investment relative to income. They are also meant to have ''expenditure-switching" effects, by means of reorienting production towards tradables and away from non-tradables. No policy, including orthodox policies, can be said to be distributionally neutral in the sense of leaving the distribution of income between factors of production, between sectors, or between households unchanged after the policy is applied. These policies will affect the income and the welfare of the poor through changes in prices, changes in their entitlements, and changes in employment.

Once it is established that stabilization policies do affect the distribution of income, it is necessary to find out which groups are likely to gain and to lose. The burden of adjustment will not be borne equally by all social groups and by all industries. Are the poor the most hurt by such policies, or is it the middle classes? Will those gains and losses be felt immediately or with a time lag?

Monetarists and Structuralists

A debate over stabilization policies in developing countries that has been raging for more than a decade has set followers against critics of orthodoxy. The debate is centred around three major issues: (a) the appropriate model to analyse adjustments in developing countries, and in particular which variables are left out of the model, and the manner in which adjustments operate; (b) the empirical evidence concerning the variables of the models, for example, whether output and employment in specific sectors respond to higher prices and wages; and (c) the issue of the social cost of the policies.

At the risk of oversimplifying the debate on stabilization policies, from the point of view of their distributional consequences, the sharpest contrast is between monetarists and structuralists. Neither camp is a homogeneous bloc.

Monetarists range from the pragmatic economists of the IMP to the dogmatic academics of the University of Chicago. Their critics include mainstream Keynesians, leftist politicians, and structuralist economists. Structuralism originated in Latin America when some economists at the Economic Commission for Latin America (CEPAL) of the United Nations worked out an alternative framework to the dominant current of thought in economics in the 1950s. Today, the theory has been formalized in rigorous models and refined to take account of the major changes in the world economy. Structuralism has a strong Keynesian heritage but places emphasis on the specificity of the economic structure of developing countries as contrasted to that of more developed nations.

Monetarists view adverse distributional changes of stabilization policies as merely a by-product of unavoidable austerity policies. They put emphasis in their analysis of the causes of the crisis on past policies that are overly expansionary, and therefore recommend demand management policies, mainly through the use of monetary instruments. To avoid drastic changes in the distribution of income during the stabilization period, they recommend corrective measures.

Structuralists, by contrast, consider that orthodox stabilization policies are essentially stag inflationary and work precisely because of the changes that occur in the distribution of income as a result of forced savings and of relative price changes.

Some authors disagree with the statement that structuralism represents an alternative to orthodox stabilization policies. In a recent paper, it was argued that "structuralist/populist" policies - as the authors call them - address long-term issues of development such as the removal of supply bottlenecks and do not have a coherent approach to short-term economic management [16]. The Chilean experience of 1970-1973 and the Argentine experience of 1973-1976 are cited as examples of structuralist/populist policies and are identified with expansionary policies that soon result in undesired inflation. The conclusion is that "the debate about least-cost methods of short-run adjustment is not one between orthodoxy and structuralism but rather concerns the range of options within orthodoxy." This assessment is based on a partial judgement of structuralism, that considers only the policies advocated by R. Prebisch and CEPAL during the 1960s. It disregards the recent works of the "neo-structuralist" authors [15] who are very much concerned about the short run and have worked out a fairly elaborate critique of orthodoxy, although by their own admission "progressive economists have not been much more coherent [than orthodox ones] in their judgment about possible effects of redistribution" [15].

Consequences of Stabilization Policies for the Poor

As scandalous an omission as it may seem, given the importance of the topic, economists know very little about the distributional consequences of stabilization policies in developing countries. There is no systematic empirical evidence on the subject, and information can only be pieced together from isolated case studies, with the usual problems of comparability involved. One is thus reduced to a fairly abstract discussion about the likely impact that the policies listed above can have on the distribution of income, given what is known about the latter.

There is evidence on increases in absolute poverty on the one hand and on stabilization efforts on the other in the same country and during the same period, but the difficulty is to link these two elements.

First of all, empirical problems stand in the way. There is hardly any time-series information about the size distribution of income across households, especially in the poorer developing countries. India, the Philippines, and a few other countries have some survey data, but this is not generally true for developing countries as a whole, for the simple reason that such survey data are expensive and difficult to collect and are politically very sensitive.

Second, seemingly insurmountable analytical problems exist. Although inferences can be made from an analysis of a concrete situation, it is extremely difficult to determine the causality of events. Analytically sophisticated applied models, such as the fairly recent computable general equilibrium (CGE) models for developing countries, are a promising beginning. Simulation experiments with these models (which have all been constructed for middle-income countries such as Korea, Turkey, Thailand, Egypt, Cameroon, the Philippines, and Colombia- not for low-income countries) have established some important facts. Dervis, de Melo, and Robinson wrote, "There are certainly significant changes in the relative distribution among socio-economic groups, with some groups gaining in absolute terms in spite of an overall decline in real income as a result of the external shock" [17]. It is difficult to generalize conclusions across countries (or groups of countries), however, because "differences in economic environment alone suffice to make different groups gain or lose, even with the same adjustment policy. Different adjustment policies also have quite different effects on the distribution" [17].

On the other hand, the distribution of income is precisely the weakest link in those CGE models, which seem too mechanical to depict the complexities of the situation involved. Using such a model, Adelman and Robinson [18] found in the case of Korea that the distribution of factor income is very sensitive to policy changes, but that the size distribution is remarkably stable with respect to those same policy changes. It is difficult to explain this puzzle in the framework of the model itself, because it does not consider dimensions that are important in poor countries, such as the variance of income within the same category of households, the unequal distribution of assets, etc.

The same group of households can lose in real terms from the point of view of the factor distribution (e.g., a real wage decline for farm workers' families), but will probably try to compensate this loss by seeking additional employment for women or children, by diversifying its activities (e.g., agriculturalists being at the same time artisans) in order to hedge against risks of real income losses, or by selling off assets.

In the absence of conclusive evidence, the short-term effect of stabilization policies on absolute poverty can be analysed only on a case-by-case basis, with knowledge of a few important stylized facts about developing countries.

In the remainder of this paper, we address implications for the poor of short-run stabilization measures. By short-run measures, we mean the traditional components of stabilization, which are (a) fiscal stabilization, (b) monetary stabilization, and (c) exchange depreciation, thus excluding liberalization attempts that increasingly accompany traditional stabilization packages. Financial liberalization, trade liberalization, and other "new orthodox'' [16] or ''neo-conservative" [19] policies are sets of microeconomic adjustment measures that have the long-term objective of improving the efficiency of the economic system and of moving the economy in a laissez-faire direction.

The reason for not discussing such policies at length is simply that their success depends very much on the particular structure and historical background of individual countries, and it is hard to generalize. "The case for microeconomic adjustment has to be made for each country based on the details of its own particular distortions and on an analysis of the likely consequences of change. The general argument for liberalization will not, and should not, be sufficient to persuade responsible policymakers to move in that direction without judging the consequences" [20]. The experience with such measures is, at best, mixed, and in most cases microeconomic adjustments impose heavy short-term costs. The experience with financial and trade liberalization in southern-cone countries (Chile 1974-1984, Argentina 1976-1982, and Uruguay 1974-1983) has been unfavourable and has had disastrous economic and social consequences [19, 21, 22].


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