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Overview Hugh Bredenkamp and Susan Schadler In the aftermath of the debt crisis of the early 1980s, many of the IMF's poorest member countries embarked on far-reaching programs of adjustment and economic reform. The severity and structural nature of the economic problems to be addressed suggested a need for longer-term financial support than that available under the IMF's conventional instrument for members' use of its resources, the Stand-By Arrangement. At the same time, given the low per capita incomes and typically large external debts of the countries concerned, there was a desire in the international community to ease the burden of new IMF loans by offering them to eligible borrowers on highly concessional terms. Those benefiting would be expected to combine strong macroeconomic policies with extensive reform of their economic systems, to remove distortions, enhance efficiency, and redirect the role of government in the economy. These circumstances led to the creation of the IMF's Structural Adjustment Facility (SAF) in 1986, followed a year later by its successor, the Enhanced Structural Adjustment Facility (ESAF). By the end of 1994, 36 countries had drawn on the ESAF, in support of 68 multiyear programs.1 This volume is a collection of studies prepared by IMF staff for an internal review of the experience of ESAF-using countries, and the programs they undertook, during 1986–95. Reviews of this kind are carried out periodically at the request of the IMF's Executive Board. They provide an opportunity to take stock of policies implemented and outcomes achieved, and to identify ways in which the design and execution of future programs can be strengthened. A summary report of the current review, drawing together the results of the staff studies and setting out policy recommendations, was recently published (IMF, 1997).2 In a new initiative, the IMF's Executive Board also commissioned an independent review of the ESAF, to be conducted by outside experts, with a particular focus on three aspects: developments in countries' external positions; social policies and the composition of government spending; and the determinants and influence of differing degrees of national "ownership" of ESAF-supported programs. The findings of the independent evaluation were also published in 1998 (IMF, 1998). Summary of the Chapters The approach to evaluating IMF-supported programs, and of structural adjustment more generally, has been the subject of considerable controversy over the years. Much of the debate arises from differing presumptions about what questions can reasonably be asked of the data. Some evaluations have sought to establish whether countries experienced faster economic growth, or had more favorable outcomes for other key variables, as a result of their choice to adopt an IMF-supported program. Such questions can be addressed only by postulating an alternative (counterfactual) set of policies--those that would have been pursued in the absence of the program. In Chapter 2, which gives a brief perspective on methodological issues, Hugh Bredenkamp notes some of the difficulties and limitations of an approach that relies on explicit identification of the counterfactual. Instead, the present study assumes that the basic strategy for growth and adjustment underlying the ESAF--which is based on a large body of analytical and empirical literature that draws on the experience of all developing countries--is the right one. The aim, then, is to examine how well that strategy was reflected in the design and execution of programs, how much progress was made in strengthening economic performance, and in what respects the basic strategy can be refined and improved. As Bredenkamp explains, in using various tools--before-and-after, cross-country, and control group comparisons--to shed light on these questions, no assumption is being made that policies or outcomes were necessarily "caused" by ESAF support or conditions. Rather, the question is how strong were the policies and outcomes supported by the ESAF. To provide a context for what follows, Sharmini Coorey lays out in Chapter 3 some of the background against which ESAF-supported programs were implemented. She describes, first, the range of economic problems that countries faced as they put together their first ESAF-supported programs. Unlike most countries that have sought IMF assistance through Stand-By Arrangements, ESAF users tended not to suffer from acute, but temporary, macroeconomic instability. Rather, they were weakened by entrenched structural defects in their economies--a legacy, by and large, of the inward-oriented and dirigiste development strategies of the 1960s and 1970s. Controls and distortions had stifled saving, investment, and growth, while the institutions essential for a market economy remained undeveloped or dysfunctional. The government and external accounts were in chronic imbalance, feeding severe debt burdens and often high inflation. Coorey goes on to outline the principal elements of the reform strategy supported by the ESAF, which aimed to reverse these trends by reducing macroeconomic imbalances, promoting saving, liberalizing and opening up markets, strengthening institutions, and mobilizing external financial assistance on appropriate terms. For much of the late 1980s and early 1990s, this challenging agenda had to be implemented within a difficult environment, as countries saw their terms of trade deteriorate and some experienced severe civil strife and natural disasters. After 1993, by contrast, global conditions were generally favorable and are likely to have contributed to the striking recovery of economic growth witnessed in ESAF countries during 1994–96. The record of policy reforms and adjustment in ESAF countries from the mid-1980s through 1995 is the focus of Chapter 4. Louis Dicks-Mireaux, Jean Le Dem, Steven Phillips, and Kalpana Kochhar tell a story of qualified progress, with consistent but often hesitant advances in most areas of economic policy. There were disappointments, certainly, in some respects and in some countries, but all ESAF users ended the period under review with economies that were more flexible and market-oriented than a decade earlier. Moreover, there were signs of a general strengthening of the adjustment effort in the early 1990s, especially in Africa, increasing the likelihood that recent improvements in economic performance can be sustained. Overall, the clearest advances were in the dismantling of state control over exchange and trade systems, price setting, and marketing arrangements. The liberalization of exchange markets helped to correct widespread and often severe overvaluation in countries' real exchange rates, thereby promoting openness to trade. There was also some progress in reorienting government spending toward health, education, and infrastructure. The study finds much less encouraging evidence in the areas of public enterprise reform and bank restructuring, where slippages in implementation were commonplace and overall progress, in most countries, was limited. On the macroeconomic front, the worst instances of high inflation were tackled effectively, but many countries failed to reach single-digit inflation, despite successive programs in which that was a stated objective. Moreover, although three-year programs sought to cut budget deficits by almost half, on average, only about half of this adjustment was achieved. The continuing burden of public enterprises and meager progress in civil service reform were major factors impeding adjustment.3 Several of the later chapters are devoted to analyzing these various weak points and to developing proposals for stronger action in future programs. The object of countries' policy efforts, and the ultimate goal of the ESAF, was to promote sustained economic growth with improved living standards, while securing progress toward external viability. The outcomes for growth are examined in Chapter 5. Kalpana Kochhar and Sharmini Coorey show that average real per capita growth in ESAF countries (excluding transition economies), which was negative and substantially below that of other developing countries in the early 1980s, rose to a modest positive rate by the early 1990s. After 1993, the "growth gap" relative to other developing economies was eliminated. To shed light on how this convergence was achieved, Kochhar and Coorey estimate a standard empirical model that relates growth to policy indicators (including budget deficits and inflation), social and demographic factors, and terms of trade and other shocks. They verify that the parameters of this relationship are similar in ESAF and non-ESAF developing countries and, on that basis, calculate that roughly half the improvement in ESAF countries' growth between the early 1980s and early 1990s was attributable to strengthened policies, both macroeconomic and structural. The relatively weak growth performance of ESAF users in Africa is traced to more rapid population growth and inadequate investment in human capital in these countries, a fact that reinforces the importance of making room for efficient social expenditures in ESAF-supported programs. Given the finding of Kochhar and Coorey that growth is significantly and inversely related to the rate of inflation, Steven Phillips argues in Chapter 6 that the decidedly mixed record of ESAF countries in attaining low (that is, single-digit) inflation should be cause for concern. He demonstrates that, beyond the single-digit inflation range, the negative association between growth and inflation is robust, even after controlling for other factors. The analysis suggests that the causality goes from high inflation to lower growth, rather than vice versa. Moreover, it is not, as some other studies have claimed, determined only by a few observations of very high inflation. The size of the effect is sufficiently strong that the costs of failing to reduce inflation to low levels are economically as well as statistically significant. Phillips considers two possible concerns that may have led policymakers to postpone disinflation: expected short-run output costs, and the loss of seigniorage revenue for the government budget. He shows that growth typically rose immediately in ESAF-supported programs, even in those achieving substantial disinflation, and concludes that fears of a short-run weakening of output during a disinflation may be unwarranted when demand restraint is combined with supply-side reforms. The loss of seigniorage, he acknowledges, can be considerable when adjusting from the levels of inflation commonly found in ESAF countries. Disinflation therefore needs to be accompanied by durable tax and expenditure reform. Aside from these political economy considerations, it appears that most ESAF-supported programs also suffered from insufficiently ambitious fiscal tightening and the lack of an effective nominal anchor for inflation: ceilings on credit failed in this role, as monetary expansion tended to be sustained by balance of payments inflows. A case is made, therefore, for stronger fiscal programs backed up by the use of nominal anchors, in the form of money ceilings, exchange rate pegs, or formal inflation targets. In Chapter 7, Tsidi Tsikata looks at progress toward the second core objective of the ESAF: external viability. Progress is defined as a decline in debt-service burdens and reduced reliance on exceptional financing--that is, arrears, debt rescheduling, and official balance of payments support. Roughly three-fourths of ESAF users moved closer to external viability according to this definition, a somewhat higher proportion than was so judged at the time of the last ESAF review in 1993. But the gains were generally modest, particularly when debt burdens are measured in relation to GDP rather than exports. Tsikata analyzes the possible reasons for differing performance across countries and finds that some obvious explanations, such as variation in the size of current account deficits or in the generosity of debt relief, are not supported by the evidence. Instead, he concludes that it is the pace of economic growth, particularly when export-led, that most clearly distinguishes those countries making strong progress toward external viability from the rest. This suggests that growth and external viability are complementary objectives, and that policies furthering one will tend to contribute to both. Less reassuring is a finding that access to external financing (if represented by the pace of debt accumulation) is not, as might have been expected, closely linked to a country's compliance with its IMF-supported program. In Chapter 8, Jorg Decressin, Zia Ebrahim-zadeh, Louis Dicks-Mireaux, and Ali Ibrahim investigate the reasons for the persistent difficulties that many ESAF countries have had in moving ahead in two important areas of reform: improving the financial position and efficiency of public enterprises and addressing weaknesses in banks' portfolios and practices. Using a case-study approach, the authors highlight the failure to impose effective budget constraints and management accountability on public enterprises as a principal cause of the slow progress in rectifying the weakness of public enterprises. They conclude that more extensive privatization may be the only solution to these problems in many countries, and they note that programs have been moving in this direction in recent years. So long as firms remain under state ownership, however, it is argued that governments will need far better information about enterprise finances than most currently have if they are to exert the necessary financial discipline. The compilation of adequate financial data on public enterprises should therefore be given high priority in future programs. More can also be done to foster market discipline, by removing the monopoly rights of public enterprises and liberalizing investment codes. The inefficiencies and mismanagement of public enterprises contributed to a substantial accumulation of bad loans in the banking systems of ESAF countries. The authors explain how this problem was related, in turn, to structural weaknesses in the banks' own management, stemming typically from government intervention in lending decisions and insufficient prudential regulation and supervision. They note that successful reform will require, among other things, that governments agree to cede political influence over banks' operations. Two suggestions are made for enhancing the design of ESAF-supported programs in this area. First, a full assessment of the (often very large) fiscal costs of bank restructuring should be made at the outset, so that the costs can be fully incorporated into programs and financing can be identified. This may lead to the selection of more efficient restructuring strategies, and it should reduce the likelihood of reforms running into financial roadblocks during implementation. Second, programs should include a comprehensive, medium-term reform strategy for the banking sector and set specific objectives for improving key aspects of bank regulation and supervision, such as licensing and closure policies, the application of capital standards, and loan provisioning rules. The aim would be to move away from an emphasis on approving plans and passing laws, and to focus instead on the effective functioning of the apparatus for regulating banking systems. The final chapter, by Mauro Mecagni, adopts a quite different perspective on the experience with ESAF-supported programs. Rather than looking at specific policies and their consequences, he examines the overall continuity of the adjustment effort, as represented by the completion (or otherwise) of IMF-supported programs. Mecagni finds that only about one SAF or ESAF arrangement in four was completed without significant interruption, and that 28 of the 36 countries under review experienced at least one such interruption. Stop-go policies have been shown in other studies to be damaging for economic performance, and a brief review of the experience in the ESAF countries suggests that growth and investment were weaker in countries that experienced interruptions than in those that did not. Chapter 9 therefore asks whether there are changes in the design or monitoring of ESAF-supported programs that could enhance policy continuity. Some possibilities emerge: a more proactive approach by the IMF to the provision and coordination of technical assistance; greater use of contingency planning to deal with potential shocks; and more frequent monitoring of programs and assignment of resident representatives. Mecagni argues, however, that these measures, although worthwhile, would probably not have averted most of the interruptions witnessed in the past. In general, interruptions occurred when large and deep-seated deviations of actual from programmed policies had occurred, and the difficulties in formulating or adhering to sound policies could be traced to political upheavals or to flagging national commitment. To lessen risks of this kind--for instance, around the time of elections, when pressures on policymakers are often severe--the IMF would need to seek greater assurances than in the past with respect to a government's willingness and ability to carry out its policy commitments.
Abed, George T., and others, 1998, Fiscal Reforms in Low-Income Countries: Experience Under IMF-Supported Programs, Occasional Paper 160 (Washington: IMF). International Monetary Fund, 1997, The ESAF at Ten Years: Economic Adjustment in Low-Income Countries, Occasional Paper 156 (Washington: IMF). ———, 1998, External Evaluation of the ESAF: Report by a Group of Independent Experts (Washington: IMF). Schadler, Susan, Franek Rozwadowski, Siddharth Tiwari, and David Robinson, 1993, Economic Adjust-ment in Low-Income Countries: Experience Under the Enhanced Structural Adjustment Facility, Occasional Paper 106 (Washington: IMF). Schadler, Susan, Adam Bennett, Maria Carkovic, Louis Dicks-Mireaux, Mauro Mecagni, James Morsink, and Miguel Savastano, 1995, IMF Conditionality: Experience Under Stand-By and Extended Arrange-ments, Part I: Key Issues and Findings, Occasional Paper 128 (Washington: IMF).
1Under the ESAF, resources are provided in phased disbursements over the course of a three-year adjustment program. They are repayable over 10 years with a 5!/2-year grace period, at an annual interest rate of 0.5 percent. The 36 countries that had drawn on the ESAF by the end of 1994 were Albania, Bangladesh, Benin, Bolivia, Burkina Faso, Burundi, Cambodia, Côte d'Ivoire, Equatorial Guinea, The Gambia, Ghana, Guinea, Guyana, Honduras, Kenya, Kyrgyz Republic, Lao People's Democratic Republic, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mongolia, Mozambique, Nepal, Nicaragua, Niger, Pakistan, Senegal, Sierra Leone, Sri Lanka, Tanzania, Togo, Uganda, Vietnam, and Zimbabwe. See also Box 2.1 in Chapter 2. 2Two previous reviews are also available: one covering the experience under SAF and ESAF arrangements through 1992 (Schadler and others, 1993), and a comparable study on Stand-By and Extended Arrangements during 1988–92 (Schadler and others, 1995). 3See Abed and others (1998) for an extensive analysis of fiscal policies and developments in ESAF countries.
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