Structural AdjustmentWhat is structural adjustment?Why is it necessary?Who has been demanding it?Outline the various reforms recommended What are the political and economic consequences of this adjustment?

Structural Adjustment What is Structural Adjustment?1.Structural Adjustment refers to the steps that have to be taken by developing countries if they want to get into the globalized economy.

2.Certain reforms have to be adopted in political and economic life by the developing countries as soon as possible.

Structural Adjustment Why is Structural adjustment necessary?1.Developing countries are rapidly getting into the debt trap.

2.Production levels have fallen

3.Exports have been falling

4.Since intellectual property rights are not protected, foreign skills and knowledge have not been coming

5.For the same reason inventiveness of the local scientists has declined.

Structural Adjustment6.There is foreign exchange crisis, galloping inflation in some countries7.Governments have been collapsing. Thus two governments fell in India within a short span of four months between Nov.1990 and March 19918.The public sector has become a burden on the economy9.No funds are available for development

Structural Adjustment10.International credit is almost completely cut off11.There are large public and current account deficitsAdd other points with reference to the political and economic crisis in India today

Structural Adjustment Who is behind the demand for Structural Adjustment 1.The World Bank and the IMF. They have recommended a set of reforms.2.These bodies argue that whenever a country has adopted these reforms, it has found itself out of the economic mess. It gets into the development mode and benefits from the globalization of economy that has been taking place rapidly.

Structural AdjustmentOutline the various reforms recommended by the IMF and the World Bank.I. Measures for Stabilization1. Devalue the currency. This will make exchange rates more realistic2.Withdraw restrictions on imports. Let trade be free

Structural Adjustment3.Reduce and gradually eliminate fiscal and balance of payment deficits4.Remove all controls on prices, interest and exchange rates5.Start educing subsidies and finally eliminate them6.Introduce financial structural reforms and allow foreign financial firms to enter into your country7.Give complete autonomy to the Central Bank (RBI) to pursue an independent monetary policy

Structural AdjustmentII. Measures of Structural Adjustment1.Decontrol industries

2.Privatise government controlled industries

3.Introduce the necessary structural changes so as to promote an export led growth

4.Allow foreign capital and technology to enter the country freely

Structural Adjustment5.Allow freely foreign financial and Services industries. Allow them to close down whenever they like6.Let there be free cross border movement of capital and other funds7.Introduce the necessary legislative safeguards for the protection of intellectual property rights8.Create the necessary legal climate for enforcement of legal contracts, private property rights and free entry and exit of foreign busines, industrial and financial firms.

Structural Adjustment What are the political and economic consequences of this adjustment?Political Consequences1.We are a welfare state and it is very difficult to reduce fiscal deficits all on a sudden. As the economy develops these will be reduced. To reduce immediately will have far reaching consequences. Governments both at the centre and states have certain obligations and these cannot be ignored simply because the IMF and the WB tell us. Many countries have come to grief by following the prescriptions of these bodies.

Structural Adjustment2.Subsidies are an important means of improving the standards of living of the people. If they are removed for instance in the case of food grains or kerosene, there will be revolts.

Structural Adjustment 8II. Economic Consequences1. If we allow imports to come in freely, our industries will virtually collapse. Even the most developed countries provide protection to their industries in some form or the other,

Structural Adjustment2.Even in developing countries there are hidden subsidies. Thus construction of storage houses helps farmers to store their products in the USA. They can sell when prices are good. In our country when crops are good, since there are no storage facilities, they are sold at dirt poor prices.

Structural Adjustment3.The poor will have to be given many commodities at subsidized prices. When the price of food grains in ration shops were increased, people could just not afford to buy them and there are signs of malnutrition. We have the paradox of huge harvests and declining outflow from ration shops.

Structural Adjustment Economic consequences contd:4.How can we allow the policy of hire and fire? Wages are low in India and people live hand to mouth and there are practically no savings. If one fine morning they are fired, what will they do to survive? They have no staying power. They have no savings to draw from.

Structural Adjustment5.The Public sector has played a very great role in building infrastructure. Look at the expansion of the railways, the banks and the LIC. Would all this have taken place if there had been no public sector. Profit making is not the only goal of our economy. It should not be the only goal.

Structural Adjustment6.Whatever we do foreign countries either do not give a good price for our goods or give some excuse or the other for not buying from us. They say for instance, that we have been employing child labour or ignoring environmental issues.Add other consequences from the material on Globalization.

Structural AdjustmentSignificance of Structural Adjustment1.We had indeed reached a grave sitiuation when our foreign reserves were practically nil. We could pay only for one weeks imports. We had to sell gold to survive for some time. Structural reforms introduced by the Finance Minister Man Mohan Singh in 1991 saved us and as a result of following these reforms have have a balance of 50 billion dollars in our kitty.

Structural Adjustment2.There is no doubt that even the rich have been enjoying subsidies in India. Whoever has influence pulls the wires and gets the subsidies. This has to stop.3.There is practically no respect for intellectual property rights in India. There is intellectual piracy and widespread violation of copy rights laws. This seriously hampers research work. High time we woke up.

Structural Adjustment 4.But it also a fact that our reforms were the product of a crisis and the prodding by the IMF and the World Bank. We need to adopt the reforms suited to our country and not blindly follow what these bodies tell us. They are more interested in the developed world.5.The Public Sector cannot be completely closed down. Can we privatize water supply. Can we close down the free water taps in the slums?