ECONOMIC LIBERALIZATION NOTES
Structural Adjustment Programmes
Structural adjustment is a term used to describe the policy changes
implemented by the International Monetary Fund (IMF) and the World Bank.
Structural Adjustment Programs generally implement “free market”
programs and policy
These programs include internal changes (notably privatization and
deregulation) as well as external ones, especially the reduction of
trade barriers.
Structural adjustment in Kenya started as early as the mid 1970s.
However, initially the adjustments undertaken were not of much
significance, since they mainly involved tinkering with the economy
without changing it much. Thus up to the end of 1980 Kenya’s economy
continued to have a plethora of chocking regulations and controls on
most markets and economic activities. This resulted in economic
stagnation and called for major structural adjustments to the economy.
Bold adjustment measures were taken towards the end of 1980 and
involved, inter alia:
Decontrol of prices in the economy- Today almost all prices in Kenya
have been decontrolled. This has been part of a comprehensive economic
liberalization process implemented by the Government with the support of
the IMF and the World Bank.
Removal of subsidies- The Government removed subsidies on fertilizers,
transport and fuels. Those on education, health care and other social
services were lowered. As subsidies on most social services were lowered
they were replaced with user charges under cost sharing schemes.
Devaluation and later floating of the Kenya Shilling- This was
accompanied by the removal of almost all foreign exchange controls and
restrictions. Kenya is now pursuing a liberal foreign exchange policy.
Immediately after this the Shilling depreciated sharply, a process
similar to devaluation.
Divestiture of the Government from the private sector- The Government
has embarked on a momentous programme of divesting itself from economic
activities which are best undertaken by the private sector. For example,
it disposed of its shares in the Kenya Airways, Uchumi Supermarkets,
HFCK, Kenya Commercial Bank and others to the general public.
Retrenchment in the civil service- The Government has been laying off
civil servants and other workers in state corporations. The main
objective of doing this has been to reduce the wage bill and hence
recurrent expenditure in order to release such
resources for development expenditure. Although those laid off were
compensated with ‘golden handshakes’, many of them squandered this
money, thus and ended up poor and desperate.
Reduction in the budget deficit- The Government had been borrowing
heavily from money markets in order to finance the shortfall between
revenue and expenditure. This deficit had exploded over time to
unacceptable levels as proportions of national income. Such borrowing
crowded out the private sector from the money markets. As a result
private investors had limited access to loanable funds. Since the
private sector is more efficient than the public sector in the use of
scarce resources such as loanable funds, this denied the society the
opportunity to make the best use of its resources.
The Government tried to reduce budget deficits through sharp reductions
in public expenditure coupled with concerted efforts to increase revenue
through better taxation policies and enhanced efficiency in the
collection of revenues. Although all sectors were affected by the
reduction in public expenditure, the axe fell more heavily on the social
services such as education and health care. This is mainly because these
two sectors have historically accounted for the lion’s share of the
country’s budgetary resources.
Effects of Structural Adjustment Programmes
Adjustment has ‘social effects’, which are those extending beyond
individual households to the whole society. For example, in the short
run macro-economic adjustment reduces the overall level of income in the
economy, which translates to lower incomes for most households.
Structural adjustment programmes have both direct and indirect effects
on the political structures of an adjusting country. This is because
they change the political attitudes and behavior of those who gain or
lose as a result of the adjustment processes.
Adjustment programmes often have adverse administrative effects. This is
because a cost-recovery programme
in a country like Kenya where
public sector incomes and wages are very low tends to encourage
mis-appropriation of funds, bribery and general corruption. SAPs also
increase the debt burden of a country in terms of local currency.
Therefore in order to service such debts funds have to be diverted from
pressing administrative needs such as the police force, judiciary,
courts, and so on. This reduces the capacity of the society to fight and
manage crime.
In summary, structural adjustment programmes can have serious adverse
social effects. They lead to increased poverty, insecurity, crime and
violence. As the poor become more desperate and destitute, they easily
resort to such criminal activities as looting when riots break out. This
is because the poor increasingly ascribe their plight to ‘exploitation’
by the rich, especially Asians. These adverse social effects are more
profound among the urban poor and the underclass.
Foreign Direct Investments
Aid and loans in the 1960s and 70s created “aid dependency” and the debt
crisis in the 1980s and 90s. FDI is the best source of development
finance, on the grounds, among other, that it is self-liquidating since
foreign investors have to show profits for the host country as well as
for themselves; and it does not lead to debt overhang. A more qualified
proposition is made that “properly regulated” FDI can bring growth,
jobs, technology
