`What are SAPs?

Overview

Purpose of SAPs

Some Key Components of SAPs

Historical Backdrop of SAPs

Why Developing Countries Accepted SAPs

Overview

Structural adjustment programs (SAPs) are a package of economic and institutional measure designed to solve macroeconomic problems in developing countries by reducing government intervention in the economy, correcting the borrowing country’s deficits and opening the country’s economy to the global market. These programs, which consist of policies aimed at achieving economic growth, were initially designed and funded by the World Bank and the International Monetary Fund (IMF), and later, also adopted by other major international financial institutions (IFIs). Loans are offered in return for the transformation of economic structures through varying reforms of deregulation, privatization, slimming down of inefficient public bureaucracies, reducing subsidies, and encouraging realistic prices to emerge as a stimulus to greater productivity in order to overcome the problem of increasing external debt and foster the economic development (Leftwitch, 1996). Since their inception in the late 1970s, SAPs have become a regular feature of the development landscape. For example, annual World Bank commitments to structural adjustment totaled over 20 billion per year in the early 1990s amounting to nearly one-fourth of the Bank’s annual commitments (Elemendorf, 1993).

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Purpose of SAPs

In theory, SAPs are intended to make structural changes which will hopefully provide long-term solutions to some of the problems facing developing countries by helping them to acieve economic economic stability and sustained growth. To its proponents, structural adjustment is a forward-looking, long-term solution to underdevelopment. SAPs were created in response to the failure of so many “Band-Aid” projects and programs which only reacted to crises instead of taking a proactive, stance, seeking to preempt crises before they appear by “addressing the nature of the problem.” (Finch, 1985).

Among the objectives of SAPs are usually cited,

One of the most important purpose of SAPs is to make the economy less vulnerable to future shocks. This can be done by increasing flexibility and adaptability (Streeten, 1987).

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Some Key Components of SAPs

As earlier defined, structural adjustment programs are sets of policies designed to reduce and eventually eliminate unsustainable internal and external imbalances in economies. Structural adjustment policies seek to increase the flexibility of the economy to respond to changes, promote the efficiency of resource allocation and utilization, reduce trade deficits, and balance government expenditures and revenues.

The World Bank and the IMF consider structural adjustment to be a logical - and in many cases inevitable - means to achieve sustained economic growth and address long-term development needs. SAPs generally include the following elements:

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Historical Backdrop of SAPs

SAPs evolved as a result of three global crisis, namely; the oil crisis, the debt crisis, and the international recession from the late 1970s to the early 1980s. Developing countries faced unprecedented pressure in their external accounts after these consecutive international economic crisis. In addition, in some areas like sub-Saharan Africa, rapid population growth, adverse weather conditions such as drought and mismanagement of economy due to the political instability and corruption became major contributory factors for economic deterioration (Adepoju, 1993). Exports fell in both volume and value while imports rose. Consequently, it brought balance-of payments-problems and foreign exchange constrains. As a direct result of these events, SAPs were created to deal with the increasing economic instability in developing nations experiencing economic crisis (Stewart, 1995).

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Why Developing Countries Accepted SAPs

Typically, by the time countries seek adjustment loans, they have suffered from high deficits, rapid inflation, and capital flight. Many countries came to realize that the problems were fundamental, requiring economic reforms. However, with having many serious economic problems, many countries could not carry on reforms by themselves as before at this time because no one was willing to finance them to do so (Stewart, 1995). To ensure a continued flow of funds, countries already devastated by debt obligations have very little choice but to adhere to conditions guided by the World Bank and IMF. Loans under SAPs were virtually the only source of quick-disbursing foreign exchange available after the economic crisis since the flow of commercial loans was drastically reduced. The price paid by developing countries to gain access to foreign exchange in this situation was to agree to significant policy reform under SAPs (Weaver, 1995). They had to stabilize their economy first as quickly as possible, so as to attract foreign capital, hoping that structural changes would overcome short-term imbalances and eventually promote economic growth, especially sustainable growth.

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