WORKING PAPER

No. 17

Balance of Payments Adjustment

and Developing Countries

Tony Killick

0 85003 097 8

June 1985

Overseas Development Institute 10-11 Percy Street London W1P OJB Tel: 01-580 7683

Overseas Development Institute

WORKING PAPER

No. 17

Balance of Payments Adjustment

and Developing Countries

Tony Killick

0 85003 097 8 June 1985

Acknowledgements

This paper was originally written for an IMF/ODI Seminar held at

Cumberland Lodge in March 1985.

ODI Working papers present in preliminary form work resulting from research undertaken under the

auspices of the Institute. Views expressed are those of the authors and do not necessarily reflect the views of 001. Comments are welcomed and should

be addressed directly to the authors.

Tony Killick is Director of the Overseas Development Institute

Overseas Development Institute 10-11 Percy Street London WIP 0GB

BALANCE OF PAYMENTS ADJUSTMENT AND DEVELOPING COUNTRIES

Tony K i l l i c k

It has seemed to t h i s writer for some time that the terms "balance of payments adjustment" and the "costs" of such adjustment have come to be used i n a very loose and sometimes dis t o r t e d fashion. References to adjustment and i t s costs abound i n the recent l i t e r a t u r e but these terms are almost never defined, even though, on examination, t h e i r meaning i s far from self-evident. We here attempt to respond to t h i s deficiency before turning to discuss some problems associated with the design of adjustment programmes i n developing countries and with the long-term retreat from the notion of adjustment as an i n t e r n a t i o n a l process. The paper i s i n the form of a seri e s of notes, rather than a continuous argument.

I - ON THE MEANING OF ADJUSTMENT AND ITS COSTS

The locus of adjustment

The term 'adjustment' has come to be used almost e n t i r e l y to r e f e r to economic responses within national economies and, with few exceptions, to responses within d e f i c i t countries. However, th i s usage i s more a commen­tary on the state of world co-operation than i t i s on the process of adjustment. The l o g i c of balance of payments (BoP) accounting shows that, c o l l e c t i v e l y speaking, e f f o r t s by d e f i c i t countries alone, with no associated willingness by the rest of the world to allow t h e i r surpluses to diminish and, indeed, to encourage t h e i r reduction, are bound to f a i l . In t h i s sense, adjustment i s necess a r i l y an i n t e r n a t i o n a l process i n which surplus countries must also share. This i s a rather formal way of pointing out that i n a world of large and increased economic interdependence, the actions of any one country w i l l n e c e s s a r i l y impinge upon the well-being of a l l others - although some impinge f a r more than others I To thrust a l l or most of the task of adjustment on d e f i c i t countries i s to require them to pursue contractionary p o l i c i e s at home, and thus to impart a d e f l a t i o n a r y bias to the world economy - p r e c i s e l y what the Bretton Woods i n s t i t u t i o n s were supposed to avoid.

International responses to global BoP i n s t a b i l i t y might be thought of as f a l l i n g into three categories. F i r s t , there i s the creation and control of i n t e r n a t i o n a l l i q u i d i t y , intended to be the task of the IMF, i n an attempt to avoid the d e f l a t i o n or i n f l a t i o n that can r e s u l t when the global supply of l i q u i d i t y gets out of l i n e with the demand for i t . We might l i n k with t h i s schemes for the s t a b i l i s a t i o n of world commodity prices and export compensation schemes such as the Fund's Compensatory Financing F a c i l i t y , intended to o f f s e t and diminish short-term movements i n world trading conditions.

Second, there i s the operation of mechanisms f o r r e c y c l i n g the excess savings of surplus countries to d e f i c i t countries. The r e c y c l i n g r o l e of i n t e r n a t i o n a l banks came spectacularly to the fore i n the 1970s but r e c y c l i n g can also occur through the mechanisms of d i r e c t investment, through concessional a i d , and through i n t e r n a t i o n a l agencies l i k e the Fund and the World Bank. The r e c y c l i n g of surpluses can then rein f o r c e -but may defer - the t h i r d type of i n t e r n a t i o n a l response: adjustment on the part of both surplus and d e f i c i t countries. In the broadest terms, th i s requires d e f i c i t countries to achieve a r e l a t i v e s h i f t of resources into the production of tradeable goods and s e r v i c e s , and surplus countries to s h i f t resources i n the opposite d i r e c t i o n ; i t requires d e f i c i t countries to reduce absorption r e l a t i v e to income and surplus countries to do the opposite. While i t i s t h e o r e t i c a l l y possible f o r a l l governments to spontaneously adopt those p o l i c i e s that would contribute best to i n t e r n a ­t i o n a l adjustment, the lessons of experience indicate a need f o r more conscious co-ordination of national p o l i c i e s , through the IMF or some other means. S p e c i f i c a l l y , i t requires surplus countries Cand countries which can escape the d i s c i p l i n e s imposed by BoP d e f i c i t s because t h e i r currencies are accepted as i n t e r n a t i o n a l reserve assets) to accept that they too have a r e s p o n s i b i l i t y f or adjustment.

A l l these, no doubt, are elementary truisms. Yet those who l a r g e l y confine th e i r advocacy of 'adjustment p o l i c i e s ' to the national e f f o r t s of d e f i c i t countries are s l i p p i n g dangerously close to acceptance of an i n e f f i c i e n t l y one-sided world economic system. While most of the r e s t of t h i s paper i s p r e c i s e l y about the p o l i c i e s of d e f i c i t countries, i t i s important that we do not lose sight of the importance of i n t e r n a t i o n a l

responses of the types j u s t described, and the concluding section of t h i s paper returns to the theme of international adjustment.

Adjustment as a p o l i c y objective

At this point, we discuss the position of a country facing a BoP d e f i c i t (which i t w i l l be convenient to leave undefined for a moment) and take the mechanisms of i n t e r n a t i o n a l trade and payments and the p o l i c i e s of a l l other countries as given. In considering the nature of adjustment as an objective, we can begin by asking, i n what circumstances should adjustment p o l i c i e s be pursued, as against borrowing or running down reserves? At least i n the period of r e l a t i v e l y fixed exchange rates, the answer enshrined i n the A r t i c l e s of the Fund was that countries should adjust i n cases of 'fundamental disequilibrium' i n the BoP. As the Fund's o f f i c i a l h i s t o r y states,

... fundamental dise q u i l i b r i u m (although i t has never been formally defined) i s distinguished from merely ephemeral balance of payments d i s e q u i l i b r i a , such as those associated with seasonal, speculative, or possibly even short c y c l i c a l , disturbances (de Vri e s , 1969, p.22).

Im p l i c i t i n this view of things was the assumption that national and i n t e r ­national p o l i c i e s would be such that non-fundamental d i s e q u i l i b r i a could be financed - that there would be s u f f i c i e n t r e c y c l i n g flows and holdings of int e r n a t i o n a l l i q u i d i t y to permit purely t r a n s i t o r y d e f i c i t s to be accommo­dated, i t not being regarded as desirable to require countries to contract absorption or s h i f t the sectoral a l l o c a t i o n of resources i n the face of temporary imbalances. However, these assumptions no longer look secure, for reasons mentioned l a t e r i n the paper. The Fund i t s e l f now prefers to ta l k i n terms of the r e s t o r a t i o n of BoP " v i a b i l i t y " , whose meaning w i l l be discussed i n a moment.

On the present view, countries need to adjust whenever they have BoP d e f i c i t s that cannot be financed on acceptable terms, whether these d e f i c i t s are temporary, s e l f - c o r r e c t i n g or 'fundamental'. One d i f f i c u l t y here i s that developing countries' a b i l i t y to finance even temporary d e f i c i t s has

diminished. Many of them suffer from much diminished access to net new commercial bank loans, s t a t i c or declining r e a l l e v e l s of aid and d i r e c t

. . 2 investment, often only the slimmest margins of i n t e r n a t i o n a l l i q u i d i t y , and diminished access to Fund compensatory financing and stand-by c r e d i t s . There i s also the prospect of reduced support from the World Bank. Adjust­ment, i t seems, i s coming to the short end of the market.

But what of the r e l a t i o n s h i p between adjustment and what the a r c h i t e c t s of Bretton Woods described as the 'primary objectives of economic p o l i c y ' : f u l l employment, economic growth and development? In the past the idea of a BoP equilibrium was regarded as conditional upon the p r i o r or simul­taneous s a t i s f a c t i o n of other objectives. In t h i s t r a d i t i o n , the present writer recently offered the following d e f i n i t i o n ( K i l l i c k , 1984, p.17):

Balance of payments equilibrium exists when, i n a normal year, the basic balance (or that balance chosen as the most appro­p r i a t e for the country i n question) approximates zero i n conditions where: there are no major unwanted r e s t r i c t i o n s on trade and payments; external debts and debt s e r v i c i n g are not regarded as too large; foreign exchange reserves are regarded as adequate; and the equilibrium does not depend upon the maintenance of unwantedly deflationary domestic p o l i c i e s .

The Fund's views on the meaning of BoP ' v i a b i l i t y ' are of considerable i n t e r e s t here. The f i r s t d e f i n i t i o n of which we are aware i s by Manual Guitian of the Fund s t a f f (1981, p.24):

The concept of a viable balance of payments t y p i c a l l y means, e s p e c i a l l y for many developing countries, a current account d e f i c i t that can be financed on a sustainable b a s i s , by net c a p i t a l inflows on terms that are compatible with the devel­opment and growth prospects of the economy.

A more recent version i s taken from an a r t i c l e by a Fund s t a f f member i n the December 1984 issue of Finance and Development (Tseng, 1984, p.2):

A v i a b l e balance of payments p o s i t i o n i s normally conceived of as a current account d e f i c i t that can be financed by normal c a p i t a l inflows and that can be sustained without r e s t r i c t i o n s .

In both versions BoP v i a b i l i t y i s conditional on the s a t i s f a c t i o n of c e r t a i n other goals although these are stated as growth and development i n the f i r s t version and the absence of r e s t r i c t i o n s i n the f i n a l version.

However, to subordinate the BoP objective to other p o l i c y goals i s probably not h e l p f u l i n present-day circumstances. There i s precious l i t t l e prospect for developing countries to s a t i s f y the e a r l i e r d e s c r i p t i o n of BoP e q u i l i ­brium, nor i s there any prospect that many of them can achieve a sustainable BoP "without r e s t r i c t i o n s " . Since i n the absence of creditworthiness or surplus reserves the BoP constraint imposes i t s e l f absolutely, the p o s i t i o n i s rather that such other objectives as growth, employment-creation or l i b e r a l i s a t i o n must necessarily be subordinated to the BoP. This i s one of the consequences of concentrating adjustment e f f o r t s on d e f i c i t countries

and of the decline over the past decades i n in t e r n a t i o n a l co-operation adequate ̂

referred to i n the previous section. If there i s ^ financing then a l l well and good; i f not, then the objectives of growth, employment, etc. must perforce take second place.

Quite apart from the question of the extent to which BoP adjustment i s compatible with other objectives there are rather more technical questions about how BoP objectives are to be defined, and according to what indi c a t o r s targets are to be set. The current account (often expressed as a proportion of GDP) i s a popular variable and most of the s p e c i f i c p o l i c y measures generally b u i l t into adjustment programmes are intended primarily to influence items on the trading and i n v i s i b l e s accounts. On the other hand, flows on c a p i t a l account are also l i k e l y to be influenced by the perceived adequacy of adjustment e f f o r t s . For one thing, the Fund has i n recent years played an increasingly active r o l e i n organising supporting finance from a i d donors, i n t e r n a t i o n a l banks, etc. i n support of the s t a b i l i s a t i o n programmes i t has succeeded i n negotiating. Successful adjustment measures, p a r t i c u ­l a r l y on the exchange rate and i n t e r e s t rate f r o n t s , may also slow down.

even reverse, c a p i t a l f l i g h t . Thus, the e f f e c t of adjustment programmes on the current account may be ambiguous - both tending to strengthen i t and yet to permit a larger current d e f i c i t to be financed. From t h i s point of view, the basic balance may be a preferable i n d i c a t o r , although one would i n such cases need to pay careful attention to the debt s e r v i c i n g implications of borrowings on c a p i t a l account.

The very severe import compression that has marked the records of many developing countries i n the l a s t few years provides a further reason for not placing too much weight upon the current account as a measure of the state of health of the BoP. While we have been brought up to think of the c a p i t a l and monetary accounts as recording the manner by which any current account d e f i c i t has been financed, i n contemporary conditions the s i z e of the current d e f i c i t i t s e l f r e f l e c t s policy-makers' judgements about the amount of financing that w i l l be a v a i l a b l e . The accommodating flows have moved above the l i n e . The volume of imports thus emerges as an i n d i ­cator of c r u c i a l importance, which takes us back to the r e l a t i o n s h i p between BoP and other economic objectives. For many developing countries, the extent to which they have had to cut back on imports i s severely constraining t h e i r a b i l i t y to s a t i s f y other goals; and adjustment programmes may be judged according to the extent to which they permit some r e s t o r a t i o n of more normal import l e v e l s .

Given the strong influence within the Fund, as w e l l as i n the academic world, of monetary approaches to the analysis of the BoP, i t i s not without i n t e r e s t that of a l l the major accounting balances the o v e r a l l , or monetary, balance i s probably the least useful and the least used. Nevertheless, a strengthening of the monetary account may be an important objective and the IMF has to be concerned about countries' a b i l i t y to repay i t s c r e d i t s : "Adjustment means that when the Fund lends to d e f i c i t countries, i t does so on the basis of p o l i c i e s intended to correct such d e f i c i t s , so that the money i s lent wisely and the b e n e f i c i a r y countries are i n a p o s i t i o n to reimburse the Fund, thereby allowing i t to relend the money anew to other countries" (de Larosiere, 1980). However, the chief point to emerge from th i s discussion i s that the wise policy-maker w i l l pay attention to a range of payments i n d i c a t o r s . The determination of adjustment objectives cannot.

t h e r e f o r e , r e a d i l y be reduced t o one o r two s i m p l e s t a t i s t i c a l t a r g e t s . The outcome may be q u i t e complex, w i t h n o t a l l i n d i c a t o r s p o i n t i n g i n the same d i r e c t i o n - w h i c h i s one o f t h e r e a s o n s why i t i s d i f f i c u l t t o f orm an adequate assessment o f the e f f e c t i v e n e s s o f IMF s t a b i l i s a t i o n

3 programmes.

I s s u e s i n the d e f i n i t i o n o f a d j u s t m e n t

A s e a r c h of t h e l i t e r a t u r e has r a t h e r r e m a r k a b l y l e d t o t h e d i s c o v e r y of o n l y t h r e e a t t e m p t s t o d e f i n e BoP adjustment., a l l o f them u n s a t i s f a c t o r y , so we must s t a r t from the b a s i c s . D i c t i o n a r y d e f i n i t i o n s o f t h e word 'adjustment' r e f e r t o t h e e f f e c t s o f minor changes i n the elements o f a system so t h a t the s y s t e m can be r e n d e r e d c o n s i s t e n t o r c o h e r e n t . The emphasis i s on the a d a p t a t i o n of one t h i n g t o a n o t h e r and o t h e r synonyms o f f e r e d i n c l u d e accommodation and h a r m o n i s a t i o n . Some s t r e s s i s p l a c e d on a d j ustment as a g r a d u a l p r o c e s s of minor changes.

Economic systems a r e , of c o u r s e , c o n s t a n t l y a d j u s t i n g t o a wide v a r i e t y o f d i s t u r b a n c e s , so BoP a d justment i s s i m p l y a member of a l a r g e r f a m i l y :

/Adjustment i s / a g r a d u a l r e s p o n s e of r e s o u r c e a l l o c a t i o n t o changes i n t a s t e and the p a t t e r n of demand to c h a n g i n g t e c h n o l o g y , t o c h a n g i n g r e l a t i v e c o s t s t o changes i n c o m p a r a t i v e advantage between c o u n t r i e s , and t o changes i n the c o m p o s i t i o n o f t h e l a b o u r f o r c e (OECD, 1979, p . 8 1 ) .

Or more g e n e r a l l y :

A d j u s t m e n t p r o c e s s ; the p r o c e s s by w h i c h an economy a d j u s t s t o a change i n some economic v a r i a b l e and r e a c h e s a new s t a t e o f b a l a n c e o r e q u i l i b r i u m . A n o t a b l e example i s t h e a d j u s t m e n t of an economy t o a s u r p l u s o r d e f i c i t on the b a l a n c e of payments (Congdon and M c W i l l a i m s , 1976),

Now t u r n t o two o f t h e d e f i n i t i o n s o f BoP a d j u s t m e n t t h a t we have d i s c o v e r e d . F i r s t , an IMF f o r m u l a t i o n :

The a d j u s t m e n t p r o c e s s i n t h e b a l a n c e o f payments may be d e f i n e d as t h e c o r r e c t i o n by t h e a u t h o r i t i e s of an i m b a l a n c e , by i n d u c i n g changes i n the s t r u c t u r e o f t h e c o u n t r y ' s e x t e r n a l t r a n s a c t i o n s i n o r d e r t o e l i m i n a t e economic d i s t o r ­t i o n s and p r e s s u r e s (IMF, 1981),

Second, t h e r e i s t h i s a c c o u n t by R i c h a r d F e i n b e r g :

The d u a l t a s k o f s t a b i l i s a t i o n ( b r i n g i n g e x p e n d i t u r e s i n t o l i n e w i t h a v a i l a b l e r e s o u r c e s ) and l i b e r a l i s a t i o n ( f r e e i n g p r i c e s t o r e f l e c t i n t e r n a t i o n a l c o s t s t r u c t u r e s ) makes f o r a f o r m i d a b l e agenda. T h i s c o m b i n a t i o n o f income s t a b i l i s a ­t i o n and p r i c e a l t e r a t i o n i s commonly r e f e r r e d t o as 'adjustment' ( F e i n b e r g , 1984, p . 4 ) .

There a r e a number o f i s s u e s a r i s i n g h e r e but we may remark one or two c u r i o s i t i e s s t r a i g h t away. Note f i r s t the o m i s s i o n i n t h e IMF v e r s i o n of any r e f e r e n c e t o t h e r e s t o r a t i o n of a v i a b l e BoP. The o b j e c t i v e i s i n s t e a d d e f i n e d v a g u e l y as the e l i m i n a t i o n o f 'economic d i s t o r t i o n s and p r e s s u r e s ' . However, even i f we were t o s u b s t i t u t e ' r e s t o r a t i o n o f BoP v i a b i l i t y ' the r e s u l t would s t i l l be too g e n e r a l t o be h e l p f u l . Note second F e i n b e r g ' s i d e n t i f i c a t i o n of l i b e r a l i s a t i o n as one o f two major components o f a d j u s t m e n t and h i s l a c k o f r e f e r e n c e t o t h e i n t e r n a l r e a l l o c a t i o n o f r e s o u r c e s , as d i s t i n c t f rom 'income s t a b i l i s a t i o n ' . As a m a t t e r of a c t u a l p r a c t i c e , l i b e r a l i s a t i o n i s o n l y sometimes r e g a r d e d as an e s s e n t i a l p a r t o f an adjustment programme - d epending, no doubt, on the i n i t i a l e x t e n t o f p r i c e d i s t o r t i o n - w h i c h i s one o f the r e a s o n s why h i s d e f i n i t i o n i s n o t e n t i r e l y s a t i s f a c t o r y .

One of the o t h e r i s s u e s thrown up by c o m p a r i s o n o f the IMF and F e i n b e r g f o r m u l a t i o n s i s the q u e s t i o n , what i s b e i n g a d j u s t e d ? F o r F e i n b e r g (and a l s o i n the g e n e r a l d e f i n i t i o n s by the OECD and Congdon and M c W i l l i a m s ) i t i s the d o m e s t i c economy - t h e l e v e l o f e x p e n d i t u r e s , the system o f p r i c e r e l a t i v i t i e s . For t h e IMF, on t h e o t h e r hand, i t i s a p p a r e n t l y t h e BoP i t s e l f w h i c h i s b e i n g a d j u s t e d , w i t h the emphasis on a d j u s t m e n t ' i n ' the BoP and on changes i n t h e s t r u c t u r e o f e x t e r n a l t r a n s a c t i o n s . C l e a r l y , t h e r e c o u l d be major p o l i c y d i s a g r e e m e n t s between tho s e who would a d j u s t the BoP to t h e d o m e s t i c economy and t h o s e who would a t t e m p t t h e o p p o s i t e . Indeed, t h i s t y p e o f i s s u e may u n d e r l i e some o f the d i s a g r e e m e n t s t h a t a r i s e i n s tand-by n e g o t i a t i o n s between the IMF and member governments. N e v e r t h e l e s s , t h e r e would p r o b a b l y n o t be any l a r g e d i s a g r e e m e n t t h a t p r i m a r i l y i t i s the BoF w h i c h i s the c o n s t r a i n t t o w h i c h the d o m e s t i c economy must be a d j u s t e d . Of c o u r s e , t h e r e i s no r i g i d s e p a r a t i o n : t h e t r a d e a b l e goods s e c t o r s w i l l be among the prime t a r g e t s o f a d j u s t m e n t measures and, i f s u c c e s s f u l , a d justment w i l l r e s u l t i n improvements i n t h e BoP. N e v e r t h e l e s s , t h e p r i m a r y emphasis i n r e c e n t y e a r s has been upon how n a t i o n a l economies can a d j u s t t o t h e e x t e r n a l shocks w h i c h have been

such a feature of the past decade.

A further question prompted by the Feinberg d e f i n i t i o n concerns the r e l a t i o n s h i p between BoP adjustment and s t a b i l i s a t i o n . In b u i l d i n g 'income s t a b i l i s a t i o n ' so prominently into h i s d e f i n i t i o n Feinberg was d i f f e r i n g with those who d i s t i n g u i s h between s t a b i l i s a t i o n and adjustment. On the face of i t , t h i s i s a useful d i s t i n c t i o n , between the short-term demand management programmes associated with the IMF and the longer-term 'supply-management' (or s t r u c t u r a l adjustment) programmes of the type introduced by the World Bank. Not the l e a s t of i t s a t t r a c t i o n s i s that i t provides a framework within which i t i s easier to recognise the tensions that may e x i s t between the demand and supply measures. At least i n the recent past s t a b i l i s a t i o n has been associated with import compression, whereas s t r u c t u r a l adjustment i s l i k e l y to require a d d i t i o n a l imports -of c a p i t a l goods, intermediates - and even consumer goods, acting as 'incen­t i v e goods' . The r e s t r a i n t of demand i n s t a b i l i s a t i o n e f f o r t s helps the BoP by reducing the demand for imports and r e l e a s i n g resources for exports; with s t r u c t u r a l adjustment weak domestic demand may be a hindrance to the investment and productive adaptation necessary for the longer-term strength of the BoP. IMF-type programmes are l i k e l y to place p a r t i c u l a r stress on the l i m i t a t i o n of domestic c r e d i t - which may, however, i n h i b i t the invest­ments i n fixed and working c a p i t a l necessary f o r s t r u c t u r a l change. Demand management may require severe r e s t r a i n t of government spending, whilst supply management may necessitate an enlarged d e l i v e r y of economic services and i n f r a s t r u c t u r a l investment by the state.

In the end, however, a usage based on a d i s t i n c t i o n between demand and supply management probably cannot be sustained because of the e s s e n t i a l complemen­t a r i t y between them. While the tensions referred to above are very r e a l , the e s s e n t i a l f a c t i s that success i n strengthening the BoP (current account) necessitates a reduction i n absorption r e l a t i v e to income. While the inte n t i o n under the supply management route i s to achieve t h i s r e s u l t p r i n c i p a l l y by r a i s i n g r e a l incomes, demand management w i l l s t i l l be necessary i f absorption i s not to r i s e at l e a s t as f a s t as incomes -e s p e c i a l l y i f the supply-side measures require an actual increase i n invest­ment. Moreover, as i t frequently protests, the Fund progranmes are not

e x c l u s i v e l y concerned with the l i m i t a t i o n of demand, and measures such as devaluations act both to absorb excess demand and to r e a l l o c a t e productive resources.

We would thus not wish to exclude 'income s t a b i l i s a t i o n ' from our under­standing of adjustment. Perhaps a more f r u i t f u l d i f f e r e n t i a t i o n underlying the stabilisation-adjustment d i s t i n c t i o n r e l a t e s to the time horizon over which measures are intended to have t h e i r e f f e c t s , to the degree of perma­nence of those measures. I f we go back to the d e f i n i t i o n s of adjustment-in-general offered on page 7 , and think of i t as a gradual response of resource a l l o c a t i o n , as a process by which an economy achieves a new state of balance, then we would want to exclude emergency measures, introduced as temporary expedients to produce quick r e s u l t s . S p e c i f i c a l l y , we would want to exclude measures which merely suppressed the symptoms of the BoP c r i s i s . There would probably be general agreement that an improve­ment i n the current account brought about, say, by the imposition of severe exchange controls i s not best described as adjustment. By the same token, we would not want to include an import compression brought about by some draconian repression of aggregate demand, or attack on r e a l wages, that could only be p o l i t i c a l l y tenable for a limited period. I t has nonetheless become quite common to describe the import compression of recent years i n p r e c i s e l y these terms. Thus Managing Director de Larosiere:

The weakness i n export earnings meant that the only avenue to external adjustment i n the short term was through a massive cutback i n imports, ... with obvious implications f or domestic a c t i v i t y i n these countries (1984, p.117),

Adjustment, then, i s d i f f e r e n t from suppression. I t i s more permanent, b u i l t into the a l l o c a t i o n of resources within the economy. Adjustment i s ' s t r u c t u r a l ' . But that does not make i t synonymous with 's t r u c t u r a l adjustment' a l a the World Bank. The Bank's view of s t r u c t u r a l adjustment tends to concentrate on achieving changes i n the productive system^ but i t i s desirable to take a rather broader view of economic structures. I t i s useful here to r e c a l l the three ways i n which the GDP may be measured: by

i n d u s t r i a l o r i g i n ; by e x p e n d i t u r e s ; by f a c t o r r e w a r d s . S u s t a i n a b l e a d j u s t m e n t i s l i a b l e t o r e q u i r e changes i n a l l t h r e e a s p e c t s o f t h e economy:

a) THE PRODUCTIVE STRUCTURE: T h i s i s the sense o f s t r u c t u r a l a d j u s t ­ment most c l o s e l y a s s o c i a t e d w i t h the Bank. The emphasis h e r e i s on a c h i e v i n g a r e l a t i v e s h i f t o f r e s o u r c e s from n o n - t r a d e a b l e s t o t r a d e a b l e s ^ ( t h e r e a r e d i f f i c u l t i e s about t h i s f o r m u l a t i o n t o w h i c h we r e t u r n l a t e r ) , a l t h o u g h t h e r e may be r e l a t e d q u e s t i o n s c o n c e r n i n g the r e s p e c t i v e s i z e s of t h e p u b l i c and p r i v a t e s e c t o r s .

b) THE PATTERN OF EXPENDITURES: I n d e f i c i t c o u n t r i e s f a c e d w i t h l i m i t e d a c c e s s t o e x t e r n a l f i n a n c i n g , i t i s l i k e l y t o be i m p o r t a n t t o r a i s e the volume o f s a v i n g r e l a t i v e t o c onsumption. T h i s , i n t u r n , may have i m p o r t a n t i m p l i c a t i o n s f o r b o t h t h e revenue and e x p e n d i t u r e s i d e s o f the government budget, f o r i n t e r e s t r a t e s , f o r the s o c i a l l y d e s i r a b l e l e v e l o f p r i v a t e s e c t o r p r o f i t s , f o r t h e p r i c i n g and o t h e r p o l i c i e s of p a r a s t a t a l o r g a n i s a t i o n s , and so on. I n many c a s e s , however, t h e r e w i l l be s e v e r e l i m i t s t o t h e e x t e n t t o w h i c h the s a v i n g s r a t i o can be r a i s e d , w h i c h t h e n s h i f t s a t t e n t i o n to t h e p r o d u c t i v i t y o f i n v e s t m e n t and t o measures t h a t w i l l r a i s e i t . I t

i s t o the p a t t e r n o f e x p e n d i t u r e s t h a t t h e l o n g - t e r m p o l i c i e s o f demand management mentioned e a r l i e r p a r t i c u l a r l y r e l a t e .

c) FACTOR REWARDS: M e n t i o n under (b) of t h e d e s i r a b i l i t y o f r a i s i n g the s a v i n g s r a t i o a l r e a d y c a r r i e s p o t e n t i a l l y l a r g e i m p l i c a t i o n s f o r t h e f u n c t i o n a l d i s t r i b u t i o n o f income, g e n e r a l l y f a v o u r i n g a s h i f t i n f a v o u r o f r e t u r n s t o c a p i t a l ( assumed t o be a s s o c i a t e d w i t h h i g h e r m a r g i n a l p r o p e n s i t i e s to save t h a n r e t u r n s t o l a b o u r ) . O f t e n (but n o t i n v a r i a b l y ) adjustment may r e q u i r e t h e p u r s u i t o f incomes p o l i c i e s t o r e s t r a i n t h e growth o f wages, f o r example t o r e i n f o r c e the r e a l e f f e c t s of a d e v a l u a t i o n .

We may go beyond n a t i o n a l a c c o u n t i n g a g g r e g a t e s to add a f o u r t h d i m e n s i o n to our v i e w of economic s t r u c t u r e s , t o r e f e r t o t h e framework of l a w s , c o n v e n t i o n s and i n s t i t u t i o n s w h i c h u n d e r p i n the w o r k i n g s o f the economy. These too may need t o be changed i n r e s p o n s e t o the BoP s i t u a t i o n . A n t i -u s u r y l a w s , p r a c t i c e s w h i c h r e s t r i c t the m o b i l i t y of c a p i t a l and l a b o u r , and f e u d a l l a n d t e n u r e systems f a l l i n t o t h i s c a t e g o r y .

There r e m a i n one or two o t h e r l o o s e ends i n t h e d e f i n i t i o n o f a d j u s t m e n t to w h i c h we must now t u r n . A t t h i s p o i n t we can i n t r o d u c e the t h i r d o f the d e f i n i t i o n s o f BoP a d j u s t m e n t d i s c o v e r e d i n our l i t e r a t u r e s e a r c h :

Adjustment p r o c e s s : The g e n e r i c name f o r t h e adjustment mechanisms wh i c h o p e r a t e i n t h e i n t e r n a t i o n a l economy to remove imbalances i n f o r e i g n payments. The most i m p o r t a n t mechanisms w h i c h have been advanced t o e x p l a i n the p r o c e s s a r e the g o l d s t a n d a r d , the g o l d exchange s t a n d a r d , the f o r e i g n t r a d e m u l t i p l i e r , f l o a t i n g exchange r a t e s ( P e a r c e , 1983, i t a l i c s o m i t t e d ) .

T h i s i s i n t e r e s t i n g f o r two r e a s o n s . F i r s t , u n l i k e the two e a r l i e r o f f e r i n g s , i t t a k e s an i n t e r n a t i o n a l r a t h e r than n a t i o n a l v i e w . Second and of p r e s e n t i n t e r e s t , i t v i e w s a d j u s t m e n t p r o c e s s e s as o p e r a t i n g a u t o m a t i c a l l y , r a t h e r t h a n by means o f d i s c r e t i o n a r y p o l i c y i n t e r v e n t i o n s . The J o h n s o n - M u n d e l l m o n e t a r i s t s c h o o l t a k e s a s i m i l a r v i e w , r e g a r d i n g t h e BoP as e s s e n t i a l l y s e l f - c o r r e c t i n g , i f o n l y the monetary a u t h o r i t i e s do not i n t e r f e r e . T h i s way of r e g a r d i n g the m a t t e r c e r t a i n l y c o n t r a s t s w i t h t h e d e f i n i t i o n by t h e IMF on page 7, w h i c h speaks o f a d j u s t m e n t as " t h e c o r r e c t i o n by the a u t h o r i t i e s " o f an i m b a l a n c e . T h i s l a t t e r v i e w i s p r o b a b l y more i n tune w i t h g e n e r a l usage, f o r the l i t e r a t u r e on a d j u s t m e n t i s l a r g e l y about the c h o i c e o f d i s c r e t i o n a r y p o l i c y i n s t r u m e n t s by n a t i o n a l governments. The p o i n t h e r e , no doubt, i s t h a t t h e d i s e q u i l i b r i a and shocks o f the p a s t decade have proved too s e v e r e t o be accommodated w i t h s u f f i c i e n t speed by the a u t o m a t i c t e n d e n c i e s a t work t h r o u g h the monetary system, f l o a t i n g exchange r a t e s , the o p e r a t i o n o f f o r e i g n t r a d e m u l t i p l i e r s and the l i k e . P o l i c y i n i t i a t i v e s have been needed to r e i n f o r c e the a u t o m a t i c t e n d e n c i e s . I n terms o f our u n d e r s t a n d i n g o f a d j u s t m e n t , however, we would w i s h t o i n c l u d e b o t h a u t o m a t i c and p o l i c y - i n d u c e d r e s p o n s e s , w h i c h i m p l i e s t h a t we s h o u l d be c a r e f u l t o d i s t i n g u i s h between a d j u s t m e n t and a d j u s t m e n t p o l i c i e s .

A c l o s e l y r e l a t e d i s s u e c o n c e r n s the d i s t i n c t i o n between i n v o l u n t a r y and p l a n n e d a d j u s t m e n t . Even i n the f a c e o f complete n e g l e c t by the a u t h o r i t i e s a d j u stment w i l l e v e n t u a l l y t a k e p l a c e b u t i n a c u t e l y u n c o m f o r t a b l e f o r m s , i n c l u d i n g a break-down o f import s u p p l i e s and a n e a r - c o m p l e t e l o s s o f c r e d i t w o r t h i n e s s :

Under most c i r c u m s t a n c e s a d j u s t m e n t w i l l t a k e p l a c e , w i t h o r w i t h o u t p o l i c y a c t i o n s ; t h a t i s , c l a i m s on r e s o u r c e s w i l l e v e n t u a l l y have to be l i m i t e d t o r e s o u r c e s t h a t a r e a v a i l a b l e . The i s s u e a t s t a k e i s n o t , t h e r e f o r e , whether a d j u s t m e n t w i l l be c a r r i e d out b u t whether i t w i l l be c a r r i e d out e f f i c i e n t l y , w i t h o u t i n v o l v i n g

unwarranted welfare losses, so that the productive capacity of the economy and i t s competitiveness are brought back to t h e i r p o t e n t i a l l e v e l (Guitian, 1980, p.24).

It i s because the a l t e r n a t i v e of involuntary adjustment i s p o t e n t i a l l y such

a high-cost one that the appropriate design of adjustment programmes i s

so important.

A sunmary and d e f i n i t i o n

To sum up the discussion so f a r , we have argued that:

- adjustment i s a concept that i s most appropriately applied to the i n t e r n a t i o n a l economy and which should include changes i n surplus countries, although i t i s nowadays l a r g e l y used i n the context of the national economies of d e f i c i t countries;

- adjustment i n a d e f i c i t country i s a response of the economy to an unviable BoP d e f i c i t and an attempt to reach some new e q u i l i ­brium;

- adjustment i s to be distinguished from the temporary suppression o f t h e symptoms o f t h e problem;

- i t involves changes i n the a l l o c a t i o n of resources across the structure of the economy;

- i t can occur automatically, eg. i n response to monetary stringency or a depreciating currency, but w i l l generally also require govern­ment intervention.

If we r e l u c t a n t l y accept the general usage and confine ourselves to the p o s i t i o n of d e f i c i t countries, we can now o f f e r the following d e f i n i t i o n :

Adjustment is a gradual, non-temporary response of the economy

to the existence of an unviable balance of payments deficit,

involving the reallocation of resources between sectors, between

factors and between categories of expenditure Cinoluding savings).

Such reallocations may occur automatically in response to changing

monetary conditions and price relativities but governments will

often judge it necessary to reinforce any automatic tendencies

with the introduction of discretionary policy changes.

Adjustment costs

In the d e f i n i t i o n j u s t offered we have sought to avoid the introduction of normative considerations. Hence, we have so f a r been s i l e n t on the costs and e f f i c i e n c y of adjustment processes. We turn now to a consideration of costs. Take the following account of events i n L a t i n America during 1983:

The worst possible scenario of default by one or more countries was avoided through severe domestic adjustments that had high s o c i a l costs i n terms of unemplo3nnent, i n f l a t i o n , and o v e r a l l d e t e r i o r a t i o n of l i v i n g conditions. These adjustments were necessary i n order to quickly generate a large trade surplus ... Circumstances forced most countries ... to adopt r e s t r i c t i v e p o l i c i e s that produced substantial reductions i n investment and production (Inter-American Development Bank, 1984, p.183).

The authors go on to point out that during 1983 per capita incomes declined by an average of 5.3 percent, leaving average incomes nearly one-tenth lower than the 1980 l e v e l i n r e a l terms. They also show that between 1981 and 1983 the investment r a t i o i n the L a t i n American region f e l l by almost a quarter i n r e a l terms, from nearly 26 percent of GNP to under 20 percent; and they provide data showing per capita consumption to have f a l l e n by nearly 7 percent i n r e a l terms between 1982 and 1983 a l o n e O n this evidence, adjustment does indeed e n t a i l heavy costs i n foregone present and future economic welfare. However, the matter needs to be disentangled a l i t t l e .

To begin with, we should note that many of the costs reported above were the d i r e c t r e s u l t of severe short-term compression of imports and aggregate demand which we have excluded from our d e f i n i t i o n of adjustment. Economic repression gives adjustment a bad name!

Even i f the losses i n output, consumption, etc, had been associated with genuine adjustment p o l i c i e s , however, there i s the further question whether these costs could most appropriately be attributed to adjustment per se. A country running an unviably large payments d e f i c i t must perforce reduce expenditures r e l a t i v e to incomes. In the language of the layman, i t i s l i v i n g beyond i t s means. The costs of bringing i t within i t s means are more accurately a t t r i b u t a b l e to the factors which caused the unviable d e f i c i t i n the f i r s t place. These could be adverse trends on world markets leading to a d e t e r i o r a t i o n i n the commodity terms of trade; or r i s i n g world i n t e r e s t rates; or harvest f a i l u r e s ; or past p o l i c y f a i l i n g s ; and so on.

'Costs' are i m p l i c i t i n the i n i t i a l s i t u a t i o n , i r r e s p e c t i v e of the adjustment path chosen.

However, some adjustment paths may be more e f f i c i e n t than others. I n e f f i ­cient adjustment (or neglect) w i l l add unnecessarily to those costs which are unavoidable. In such cases, i t i s accurate to speak of adjustment costs, r e f e r r i n g to that excess of costs over the unavoidable minimum - i f only they could be measured i n some unambiguous wayl Since these two types of cost cannot i n fa c t be e a s i l y separated, as a p r a c t i c a l s o l u t i o n we w i l l r e f e r to them both loosely as adjustment costs.

Viewed i n t h i s broad way, adjustment costs are t r a n s i t i o n a l costs, because adjustment i s i t s e l f a t r a n s i t i o n from an unviable to a sustainable s i t u a t i o n . In the most general terms, such costs may be defined i n terms of welfare f o r e ­gone and of the government's reduced a b i l i t y to s a t i s f y the material a s p i r a ­tions of the c i t i z e n r y . Undoubtedly, reduced l e v e l s of economic a c t i v i t y , of the type referred to by the Inter-American Bank above^ are among the most important of these. These need to be measured r e l a t i v e to some trend l e v e l , or some estimate of capacity or p o t e n t i a l . However, there may be d i s t r i b u ­t i o n a l costs as w e l l , by which i s meant s h i f t s i n the d i s t r i b u t i o n of income and the incidence of absolute poverty associated with the adjustment process and regarded by the government, or by society at large, as undesirable. F i n a l l y , there may be less tangible - but perhaps very important - 'uncertainty costs' associated with the disruption of l i f e and reduced economic se c u r i t y which i s l i a b l e to accompany adjustment. I t i s perhaps worth elaborating a l i t t l e on these three cost components.

The costs associated with reduced l e v e l s of economic a c t i v i t y are very f a m i l i a r and only one observation needs to be made. This r e l a t e s to the d i f f i c u l t choice to be made i n the r e s t r a i n t of aggregate absorption between consumption and investment. In the 1983 L a t i n American case the "brunt of the burden f e l l upon investment and the obvious point to be made about t h i s i s that i f investment were continuously held back over a longer period i t could scarcely f a i l to make s t r u c t u r a l adaptation more d i f f i c u l t to a t t a i n . Of course, not a l l investments are sacrosanct; some w i l l not promote a more e f f i c i e n t a l l o c a t i o n of resources. Nevertheless, there must be a presumption in favour of protecting r e a l l e v e l s of f i x e d investment i n the process of s t r u c t u r a l adjustment - which i s where c a l l s f o r improved IMF-World Bank coll a b o r a t i o n tend to come unstuck. On the other hand, i t i s impossible to state a blanket preference for the brunt of demand management to f a l l

upon consumption l e v e l s , f or i n developing countries i t may be p r a c t i c a l l y impossible to prevent a substantial part of the burden of t h i s from f a l l i n g upon the very poor.

This brings us, then, to the d i s t r i b u t i o n a l costs of adjustment. It i s common, e s p e c i a l l y i n c r i t i c i s m s of IMF p o l i c i e s , to a l l e g e that adjustment w i l l generally increase income i n e q u a l i t i e s and absolute poverty. Our own observations, on the other hand, suggest that i t i s impossible to generalise i n this way and that a l l w i l l depend upon the structure of the economy i n question and the adjustment p o l i c i e s chosen.^ What i s undoubtedly the case, however, i s that BoP adjustment w i l l a f f e c t poverty and income d i s t r i b u t i o n i n a number of ways. Addison and Demery (1985) suggest that these w i l l occur through three main types of mechanism: 'changes i n the l e v e l and structure of output; changes brought about by income transfers; and changes i n the accumu­l a t i o n and d i s t r i b u t i o n of assets.' They add, however, that changes effected through these mechanisms are l i a b l e to p u l l i n d i f f e r e n t d i r e c t i o n s , so that the f i n a l net outcome may be d i f f i c u l t to predict and complex.

One s p e c i f i c way i n which adjustment programmes may a f f e c t poverty and inequality is through i t s probably negative e f f e c t s on government welfare and educational programmes. This danger arises not simply out of the general budgetary stringency with which such programmes are normally

associated but also because welfare services are among the l e a s t ambiguously non-tradeable a c t i v i t i e s i n the economy, a point to which we return l a t e r . The World Bank's 1981 World Development Report was considerably exercised by the r e s u l t i n g threat to welfare programmes and pointed out that the provision of such services could be regarded as investments i n future productive capacity, to be cut only at a r i s k to the future e f f i c i e n c y of the economy (p.97):

For developing countries everywhere, the exigencies of adjustment over the next 5 to 10 years could undermine the commitment to s o c i a l programs, whose f u l l benefits are generally f e l t only i n the long term ... /Howeverj7 S p e c i f i c health and n u t r i t i o n programs can have s t r i k i n g l y rapid e f f e c t s : a project to reduce anaemia among Indonesian workers improved t h e i r p r o d u c t i v i t y within eight weeks. The e f f e c t s of malaria control can also bring quick r e s u l t s .

As regards the t h i r d category of 'uncertainty costs' mentioned e a r l i e r , these can a r i s e at both the personal and s o c i e t a l l e v e l s . At the personal l e v e l , the r e - s t r u c t u r i n g of the productive system w i l l involve the movement of workers and t h e i r dependents from one industry to another, often n e c e s s i -

t a t i n g r e l o c a t i o n . The introduction of new technologies and s h i f t s i n the factor proportions employed w i l l further increase uncertainties; they may bring a l i e n a t i o n , make old s k i l l s redundant, enforce the need to learn new ones. Such changes may be inevitable and i n some ways desirable - f o r i t i s labour mobility we are lar g e l y r e f e r r i n g to - but many w i l l regard the disruption of set t l e d ways of l i f e and the greater uncertainties of the future with aversion. At the l e v e l of society as a whole, there may be analogous costs: heightened class d i v i s i o n s , a loss of s o c i a l t r a n q u i l i t y . At the p o l i t i c a l l e v e l , the introduction of adjustment programmes may not merely reduce the l i f e expectancies of governments and ministers of finance. They may actually undermine e x i s t i n g democratic i n s t i t u t i o n s , or be associated with p o l i t i c a l l y repressive regimes, and we may agree with Foxley (1981, p.225) that i f one prefers an open, democratic society then p o l i c i e s 'that require a good deal of p o l i t i c a l repression to have a reasonable chance of

g success are c e r t a i n l y not a s a t i s f a c t o r y s o l u t i o n . '

This d e s c r i p t i o n of the various adjustment costs helps to c l a r i f y the meaning of a cost-minimising adjustment process. Such an adjustment w i l l not be stumbled upon by good fortune nor through the unfettered operation of the market mechanism; i t w i l l need t o be c a r e f u l l y d e s i g n e d so as t o m i n i m i s e the various costs, for example by taking a conscious view of the ways i n which i t s p o l i c i e s are l i k e l y to impinge upon poverty and ine q u a l i t y , and by findi n g ways of reducing the s o c i a l d i s l o c a t i o n s and uncertainties associated

9 with re- s t r u c t u r i n g . But the key factors w i l l almost c e r t a i n l y be the l e v e l of economic a c t i v i t y at which i t i s possible to achieve adjustment and the length of time a v a i l a b l e for the t r a n s i t i o n .

It i s almost i n e v i t a b l e that a programme that has to achieve large r e s u l t s over a b r i e f period w i l l have to concentrate on the repression of demand and the compression of imports. For reasons explored e a r l i e r (p.9 ), these are l i a b l e to hamper the task of s t r u c t u r a l adjustment but supply-oriented measures are generally slower acting, except to the extent that i t i s possible to bring into u t i l i s a t i o n excess capacity i n the i n d u s t r i a l and other sectors .•'•̂ Short-term measures which concentrate on reducing demand and imports represent a high-cost approach f o r countries faced with s t r u c ­t u r a l BoP problems, both as regards the l e v e l of a c t i v i t y and the 'uncertainty costs'. In the short term e l a s t i c i t y values are small; people take time to adjust and so do productive structures; the 'shocks' required to produce

quick r e s u l t s are therefore large. In the longer run the p o s s i b i l i t i e s are greater and the responses to a given p r i c e s i g n a l are larger; gestation lags can be accommodated, new s k i l l s can be acquired, new technologies embodied i n the productive system.

In c o s t - e f f i c i e n c y terms, there i s thus a powerful case for inflows of i n t e r n a t i o n a l c a p i t a l on a s u f f i c i e n t scale and f o r a s u f f i c i e n t l y sustained period to permit longer-term, more supply-oriented programmes to have t h e i r e f f e c t s , to finance the longer t r a n s i t i o n . In present circumstances, however, few d e f i c i t developing countries have access to finance on the scale required even though many of them face problems of a s t r u c t u r a l nature - a point to which we return on the f i n a l pages.

A f i n a l point on cost-effectiveness. I t i s suggested as a basic p r i n c i p l e that to be c o s t - e f f e c t i v e adjustment programmes must be d i r e c t l y r e l a t e d to the causes of the BoP problem. I f the source of weakness i s a persistent tendency to over-expand demand, through government d e f i c i t financing or excessive c r e d i t to the private sector, then a programme which r e l i e s upon the r e - s t r u c t u r i n g of the productive system i s u n l i k e l y to restore BoP v i a b i l i t y . S i m i l a r l y , a large number of developing countries have been faced with the need to re-structure t h e i r economies i n the face of non­r e v e r s i b l e deteriorations i n t h e i r terms of trade and, by the same token, t a c k l i n g these ' s t r u c t u r a l ' problems p r i n c i p a l l y by means of demand l i m i ­t a t i o n i s also l i k e l y to prove both high-cost and e s s e n t i a l l y i n e f f e c t i v e . We have elsewhere c r i t i c i s e d a number of Fund-supported programmes on these g r o u n d s , a l t h o u g h recently the Fund has b u i l t more supply-side measures into i t s p o l i c y c o n d i t i o n a l i t y .

II - PROBLEMS IN THE ADAPTATION OF NATIONAL AND INTERNATIONAL ADJUSTMENT

On the remaining pages we take up a v a r i e t y of issues r e l a t i n g to d i f f i c u l ­t i e s with the design and adaptation of national and i n t e r n a t i o n a l adjustment, commencing with the former.

Problems i n the design and adaptation of national adjustment p o l i c i e s

a) THE CAPACITY TO ADJUST: I t seems an elementary point that to be cost-e f f e c t i v e programmes need to be adapted to the varying capacities of d i f f e r e n t p r a c t i c a l d i f f i c u l t i e s with t h i s p r i n c i p l e . At the t h e o r e t i c a l l e v e l , the notion of 'the capacity to adjust' has been l i t t l e explored and

12 remains imperfectly understood. The hypothesis suggested for future exploration i s that the capacity to adjust w i l l be a r i s i n g function of the l e v e l of economic development. In a mixed economy the capacity to adjust w i l l be determined by the e f f i c a c y of the market mechanism, by the structure and technical c h a r a c t e r i s t i c s of production, and by the q u a l i t y of decision-making and execution i n the organs of the state. I t i s suggested that the e f f i c i e n c y of the market system (and of the informa­ti o n flows upon which i t depends) i s l i k e l y to be at i t s lowest i n the least developed countries. Poor communications and transport; low l e v e l s of education and l i t e r a c y ; s o c i a l and other obstacles to the mobility of labour; d u a l i s t i c c a p i t a l markets; heavy concentrations of monopoly and monopsony power; as well as the often malign influence of state interven­tions a l l conspire to make i t so. Moreover, the least developed countries are the more heavily dependent on the export of minerals and a g r i c u l t u r a l commodities, which are often subject to p a r t i c u l a r l y long gestation lags. Indeed, independence on primary product exports may have a p a r t i c u l a r l y strong negative influence on the capacity to adjust.

.../

In a rough and ready way, i t i s also p l a u s i b l e to think of the e f f i c a c y of the state as being p o s i t i v e l y correlated with economic development, including the government's capacity to achieve i t s objectives by means of the p o l i c y instruments a v a i l a b l e to i t . For example, the government's a b i l i t y to regulate aggregate demand i s l i k e l y to be at i t s lowest i n an economy s t i l l l a r g e l y based on primary production, with a l i m i t e d monetisation of economic a c t i v i t y , with poorly developed banking and other f i n a n c i a l i n s t i t u t i o n s , with a narrow tax base and with a probably i n e f f i c i e n t p u b l i c administration. Demand management should at least become a l i t t l e less d i f f i c u l t as develop­ment proceeds.

One of the deficiences of the present s i t u a t i o n i s that the practices of the agencies which provide supporting finance seem to take l i t t l e heed of coun­t r i e s ' d i f f e r i n g capacities to adjust. This i s most e x p l i c i t l y the case with the IMF, whose p r i n c i p l e of uniformity of treatment amongst members has not been interpreted to mean uniformity r e l a t i v e to c a p a c i t i e s . For example, the hypotheses suggested above would c l e a r l y point i n favour of longer-term, more gradual programmes i n most countries of A f r i c a but, i f

anything. Fund programmes i n that region tend to be even shorter than i n 13

other developing countries. The p o s i t i o n of the World Bank i n i t s Struc­t u r a l Adjustment Loans i s less c l e a r . I t i s not known to have any e x p l i c i t view of countries' capacity to adjust but i t probably i s the case that the Bank's programmes are rather more i n d i v i d u a l l y t a i l o r e d to country s i t u a t i o n s than the Fund has found possible.

If i t i s the case that the capacity to adjust i s a r i s i n g function of develop­ment then the need to re-examine the lending p o l i c i e s of i n t e r n a t i o n a l agencies

p r o b a b i l i t y and other donors has been made more urgent by the tnat world economic trends have tended to thrust the heaviest burdens of adjustment on those countries least well able to adjust. In p a r t i c u l a r , the l e a s t developed have been h i t by the collapse i n world commodity prices i n the early 1980s and

s l o w n e s s • by the of these to respond as expected to the subsequent p a r t i a l economic recovery i n OECD countries. They have been hard h i t , too, by the l e v e l l i n g o ff i n r e a l l e v e l s of b i l a t e r a l a i d , by the large prospective rdduction i n the r e a l size of IDA resources, by the reduced si z e of IMF c r e d i t s , and by the substantial withdrawal of commercial banks from new lending to many Third World countries. They now have extremely l i t t l e f i n a n c i a l room f o r manoeuvre. In f a c t , a recent paper by Fund s t a f f members suggested that A f r i c a n countries should plan on a net outflow of c a p i t a l over the next few years, given l i k e l y a i d trends and the need to improve debt

r a t i o s (Bhatia and Tahara, 1984). It seems that those least able to afford them are being forced into high-cost adjustment programmes too short-term to achieve a fundamental improvement i n BoP v i a b i l i t y .

b) THE KNOWLEDGE PROBLEM: Policy-making i s , of course, always conducted i n a state of imperfect knowledge but there appear to be p a r t i c u l a r l y serious doubts about the state of our understanding of the connections between the p o l i c y instruments employed i n adjustment and the variables they are intended to influence. There also seems to be a widening gap, i n the Fund at least and as a r e s u l t of p o l i t i c a l pressures, between the state of knowledge and donor p r a c t i c e s . These general points can be i l l u s t r a t e d by reference to the well-known 1981 a r t i c l e by Khan and Knight on s t a b i l i s a t i o n programmes i n developing countries. In t h i s they i d e n t i f y Polak-type models as having provided the broad a n a l y t i c a l framework within which most Fund programmes have been designed, i n which "there i s a f a i r l y well-defined r e l a t i o n s h i p between money, the balance of payments and domestic prices i n which the supply of and demand for money play a central l i n k i n g r o l e " (p.3). They then b u i l d upon the basic Polak approach to develop a more djmamic model which explores r e l a t i o n s h i p s between output, pric e s , international reserves, money and f i s c a l p o l i c y . They find a complex connection between domestic c r e d i t and the BoP (pp.35-6):

When a given increase i n international reserves must be achieved within a s p e c i f i e d period of time, our model y i e l d s quite a complicated path for domestic c r e d i t c e i l i n g s ... The p r a c t i c a l implication i s that policy-makers cannot 'fine-tune' domestic c r e d i t c e i l i n g s from quarter to quarter or even year to year without having much more comprehensive information about the structure of the economy than they can reasonably be expected to possess.

Since they present t h e i r model as an i n t e r p r e t a t i o n of "the basic t h e o r e t i ­c a l paradigm underlying the f i n a n c i a l programming exercises of the Fund ..." (p.4), the i m p l i c i t c r i t i c i s m of the central r o l e of domestic c r e d i t c e i l i n g s i n stand-by programmes i s quite serious. Their model emphasises that "programs designed to achieve quick r e s u l t s on the balance of payments v i a sharp d e f l a t i o n are l i k e l y to have s i g n i f i c a n t and undesirable e f f e c t s on output, employment and factor incomes, p a r t i c u l a r l y i n the short run" (p.36). In these respects they found longer-term programmes "unambigously" superior. Work by K e l l e r (1980) and Joyce (1981) has also pointed to more complex connections between c r e d i t , the BoP and the r e a l economy; and Aghevli and Rodriguez (1979) developed a model which indicated a trade-off between monetary r e s t r a i n t and output, even i n the longer term.

The point here i s not that there i s now some new consensus about r e l a t i o n ­ships between r e a l and monetary va r i a b l e s , or about the theory of BoP p o l i c y . It i s rather that research has raised serious questions about the v a l i d i t y of past approaches at a time when the a p p l i c a t i o n of those approaches appears to be becoming increasingly r i g i d . The present uncertain state of our knowledge indicates a need both for more t h e o r e t i c a l and empirical research ( i n which the d i f f e r e n t i a t i o n of economy types

may prove a useful way forward), and for a r i c h e r mix of experimentation i n the adjustment programmes that must meanwhile go forward.

c) THE QUALITY OF TRADEABILITY: It has become part of the new orthodoxy that BoP adjustment necessitates r e l a t i v e movements of resources into the production of tradeable goods and services and out of non-tradeables. This seems to say no more than that countries with payments d e f i c i t s need to produce more exports and depend less on imports, which seems obvious good sense. But what a c t u a l l y i s t h i s q u a l i t y of ' t r a d e a b i l i t y ' and what are the sectoral implications of a s h i f t of resources into items possessing t h i s quality? There would, we suppose, be support for the view that t r a d e a b i l i t y extends beyond those goods and services which happen a c t u a l l y to be traded by the country i n question at any p a r t i c u l a r time. I t may, for example, be s e l f - s u f f i c i e n t i n the production of foodstuffs and yet those commodities are capable of being traded: i f there i s a surplus they can be exported; when there i s a s h o r t f a l l the residual needs can be imported. The t e s t which t h i s l i n e of reasoning suggests i s whether or not the item i n question i s p r a c t i ­c a l l y capable of entering into i n t e r n a t i o n a l trade.

When one looks at the matter i n t h i s way, however, the q u a l i t y of non-t r a d e a b i l i t y becomes elusive, f or i t i s a c t u a l l y not very easy to f i n d items that are i n t r i n s i c a l l y incapable of being traded across national borders. Domestic water supplies? Think of Hong BCong. Roads? Well yes, except that countries can earn foreign exchange from the transhipment of goods to neigh­bouring landlocked countries, and t o u r i s t earnings can be affected by the adequacy of the roads system. The l i s t seems to b o i l down to a rather li m i t e d nmber of a c t i v i t i e s , such as house-building, welfare services provided by the state and private sector consumer services such as h a i r -dressing. T r a d e a b i l i t y , i n other words, i s a q u a l i t y possessed by most of the goods and services produced by man but i n varying degrees. Viewed i n t h i s way, the p r e s c r i p t i o n to move into the production of tradeables i s to be interpreted as a move into items possessing a high degree of t r a d e a b i l i t y and out of items possessing l i t t l e of t h i s q u a l i t y .

The matter becomes even less c l e a r , however, when one takes into account the extent to which goods with a high degree of t r a d e a b i l i t y require for t h e i r production major inputs from various non-tradeables. Take an export crop l i k e coffee. Its e f f i c i e n t production and d e l i v e r y to the ports w i l l depend, i n t e r a l i a , on the extent and q u a l i t y of government extension services, on the a v a i l a b i l i t y of storage f a c i l i t i e s , on an adequate network of feeder and trunk roads - even on an e f f i c i e n t and honest p o l i c e force. No doubt these inputs possess l i t t l e of the q u a l i t y of t r a d e a b i l i t y but i f they provide e s s e n t i a l inputs into the production of a major export commo­di t y , does one r e a l l y want to urge a general p o l i c y of s h i f t i n g resources away from such items?

It i s , however, possible to approach the matter from another d i r e c t i o n and c l a s s i f y as tradeable those goods and services whose l o c a l prices w i l l be s i g n i f i c a n t l y influenced by the l e v e l and d i r e c t i o n of comparable i n t e r n a ­t i o n a l p r i c e s . Here again, we are e s s e n t i a l l y concerned with matters of degree, for the key word i n the previous sentence was " s i g n i f i c a n t l y " - how do we draw the l i n e between si g n i f i c a n c e and i t s opposite? Nevertheless, there i s a r e a l d i f f e r e n c e between t h i s approach and the previous one, i n the extent to which i t concentrates on items which are a c t u a l l y traded. Suppose our country decided to promote s e l f - s u f f i c i e n c y i n food by p r o h i b i ­t i n g both exports and imports. Assuming the a u t h o r i t i e s were able to enforce t h i s p o l i c y , domestic food prices would be made larg e l y independent of world food prices and by t h i s test would become non-tradeables. A perhaps more common case i s where the importation of various manufactured goods i s prohibited as a way of protecting l o c a l industry. Or maybe our country i s a very remote one, so that many goods are neither exported nor imported because of p r o h i b i t i v e l y high transport costs. Again, within l i m i t s , l o c a l prices w i l l be independent of world trends.

There are at least two problems with t h i s way of making the d i s t i n c t i o n , however. F i r s t , what i s counted as tradeable i s made to depend, i n part, upon the s p e c i f i c s of government trading and protection p o l i c i e s , which can change at short notice. Second, i t i s by no means clear that BoP adjustment i s fostered by a r e l a t i v e neglect of those items which are capable of being traded but which government regulations prevent from being traded. One only has to go back to the f i r s t example of the food s e l f - s u f f i c i e n c y programme to r e a l i s e that.

In the end, then, i t i s unclear what i s a c t u a l l y conveyed by advocating a r e a l l o c a t i o n of resources i n favour of tradeables. Various kinds of services are probably the items most placed at r i s k by such a recommen­dation, but even these can r a i s e the p r o d u c t i v i t y or economic responsive­ness of workers engaged i n the production of exports or import-substitutes. The point to be made about a l l t h i s , then, i s again to urge more research, to explicate the nature of the q u a l i t y of t r a d e a b i l i t y , to explore the extent to which possession of t h i s q u a l i t y r e a l l y does give various types of economic a c t i v i t y a deserved p r i o r i t y i n adjustment programnes, and to explore the consequences for the productive structure and s o c i a l welfare of a strategy which favours the production of tradeables.

d) PRICES AND THE SUPPLY SIDE: The types of d e f i c i t - c o u n t r y adjustment c a l l e d f o r as a r e s u l t of world economic trends over the past decade have ne c e s s a r i l y thrust more importance on the adaptation of productive s t r u c ­tures. The World Bank's Structural Adjustment i n i t i a t i v e was, of course, an e x p l i c i t response to t h i s . As noted e a r l i e r , the Fund has been c r i t i c i s e d f o r a r e l a t i v e neglect of the supply side but i n the past year or more has l a i d down more supply-side measures as preconditions ('prior actions') to i t s stand-by programmes. What gives cause for some concern with respect to both organisations, however, i s the extent to which they apparently i d e n t i f y the s o l u t i o n of supply-side d e f i c i e n c i e s with 'getting p r i c e s r i g h t ' . Take, for example, the following a u t h o r i t a t i v e account of the 'sectoral and sub-sectoral concerns' that are regarded by the Bank as important to s t r u c ­t u r a l adjustment and development:

- the r e l a t i v e r o l e s of the public and p r i v a t e sectors i n economic a c t i v i t y ;

- the way markets are permitted to develop or are organised by governments;

- the process and c r i t e r i a by which the l e v e l and structure of a g r i c u l t u r a l p r ices are determined;

- the i n d u s t r i a l p o l i c y framework within which industry operates and expands, as determined by t a r i f f s , import l i c e n s i n g systems, and investment promotion schemes;

- the appropriate structure of energy p r i c i n g and taxation that w i l l both induce an e f f i c i e n t supply of energy to r e f l e c t projected comparative costs of imported and domestic sources and at the same time bring about whatever l e v e l of energy conservation i s considered desirable; and

- a well-formulated public expenditure program (Please, 1984a, p.84).

Only the l a s t item i s not c h i e f l y concerned with improving p r i c e r e l a t i v i t i e s .

S i m i l a r l y , a r e c e n t a r t i c l e by a Fund s t a f f member on adjustment r e c o g n i s e s b o t h e x c e s s demand and s u p p l y weaknesses as r e q u i r i n g p o l i c y c o r r e c t i v e s but c h a r a c t e r i s e s t h e s u p p l y p r o b l e m i n t h e f o l l o w i n g terms (Tseng, 1984, p . 2 ) :

Where t h e i m b a l a n c e s a r e a t t r i b u t a b l e t o an i n a d e q u a t e growth i n s u p p l y because o f s t r u c t u r a l weaknesses r e f l e c t i n g p r i c e d i s t o r t i o n s i n the economy, p o l i c i e s would aim t o improve t h e a l l o c a t i o n of r e s o u r c e s so as t o s t r e n g t h e n the p r o d u c t i v e base o f t h e economy.

The s u p p l y problem i s t h u s i d e n t i f i e d w i t h p r i c e d i s t o r t i o n s and i t i s t h e r e f o r e not s u r p r i s i n g t h a t the s u p p l y - s i d e c o n d i t i o n a l i t y nowadays v n r i t t e n i n t o Fund programmes emphasise p r i c e c o r r e c t i o n s . Thus, i n a d d i t i o n t o t h e f a m i l i a r i n g r e d i e n t of exchange r a t e d e p r e c i a t i o n s , measures w h i c h have become common i n c l u d e i n t e r e s t r a t e r e f o r m s , t h e removal o r r e d u c t i o n o f consumer s u b s i d i e s , and r e f o r m s i n p a r a - s t a t a l and p r o d u c e r p r i c i n g p o l i c i e s .

There a r e two d i f f i c u l t i e s w i t h t h i s way o f l o o k i n g a t t h i n g s . F i r s t , the i n c r e a s e d i m p o r t a n c e o f a d j u s t m e n t s i n the p r o d u c t i v e s y s t e m o v e r t h e p a s t decade i s n o t , i t i s s u g g e s t e d , due t o some sudden d e t e r i o r a t i o n i n t h e e f f i c i e n c y o f d o m e s t i c p r i c i n g systems, however i m p e r f e c t t h e y may be: i t i s due t o t h e need t o s h i f t r e s o u r c e s i n f a v o u r of t r a d e a b l e s (q.v.) i n t h e f a c e o f a n o n - r e v e r s i b l e d e t e r i o r a t i o n i n the commodity terms o f t r a d e . T h i s need a r o s e , i r r e s p e c t i v e of the p r i o r e x i s t e n c e of p r i c e d i s t o r t i o n s , a l t h o u g h t h e r e i s no doubt t h a t r e d u c i n g such d i s t o r t i o n s can g r e a t l y a s s i s t adj ustment.

The second d i f f i c u l t y i s t h a t , however i m p o r t a n t , i m p r o v i n g the s t r u c t u r e of p r i c e i n c e n t i v e s i s o n l y p a r t o f t h e s o l u t i o n t o t h e s u p p l y problem. Adequate s t r u c t u r a l a d j u s t m e n t p o l i c i e s a r e l i k e l y t o r e q u i r e a v a r i e t y o f n o n - p r i c e measures w h i c h , however, may be n e g l e c t e d on p r e s e n t a t t i t u d e s . Depending on c o u n t r y c i r c u m s t a n c e s , t h e s e c a n i n c l u d e new i n v e s t m e n t s i n , and improved maintenance o f i n f r a s t r u c t u r a l f a c i l i t i e s ; t h e s t a t e p r o v i s i o n o f a d v i s o r y s e r v i c e s - t o f a r m e r s , s m a l l b u s inessmen, e x p o r t e r s , f o r e i g n i n v e s t o r s , e t c ; the p r o v i s i o n o f l a b o u r t r a i n i n g f a c i l i t i e s ; a g r i c u l t u r a l (and perhaps o t h e r ) r e s e a r c h and development; l a n d r e f o r m s ; g e o l o g i c a l s u r v e y s ( w i t h s p e c i a l r e f e r e n c e t o energy s o u r c e s ) ; r u r a l c r e d i t ; e x p o r t c r e d i t and i n s u r a n c e ... and so on.

I t w ould be a p i t y i f , i n t h e i r e f f o r t s t o adapt c o n d i t i o n a l i t y t o c h a n g i n g needs, t h e i n t e r n a t i o n a l a g e n c i e s - t o say n o t h i n g of b i l a t e r a l d o nors - were to f a i l t o g i v e adequate w e i g h t t o such n o n - p r i c e components. I n economies

subject to large d i s t o r t i o n s , p r i c e reforms w i l l be a necessary but probably , not s u f f i c i e n t condition of adjustment. And some r e l a t i v e l y undistorted economies w i l l s t i l l need non-price measures, or have needed them i n the past.

The ret r e a t from i n t e r n a t i o n a l adjustment

We return f i n a l l y to the topic of i n t e r n a t i o n a l adjustment. I t was pointed out e a r l i e r that, although adjustment i s most appropriately regarded as an i n t e r n a t i o n a l process, i t has come to r e f e r l a r g e l y to the n a t i o n a l p o l i c i e s of d e f i c i t countries. We can now go beyond t h i s , to r e f e r to a s e r i e s of decisions which add up to an attack on the basic philosophy and i n s t i t u t i o n s of i n t e r n a t i o n a l adjustment.

Over the past three or four years the following developments have occurred, lar g e l y as a r e s u l t of i n i t i a t i v e s by the US administration but with the support of a nimiber of other major i n d u s t r i a l countries;

a) The decision around the middle of 1981 to put into reverse the attempted l i b e r a l i s a t i o n of Fund c o n d i t i o n a l i t y that had gained pace during 1979-80.•'•̂ Among other things, t h i s involved p l a c i n g the Extended F a c i l i t y into v i r t u a l suspense, apart from a small number of s p e c i a l cases. This F a c i l i t y was, of course, set up i n response to developing country complaints about the excessively short-term nature of stand-by c r e d i t s . At the same time i n 1981 the c o n d i t i o n a l i t y associated with stand-bys was made more rigorous i n a number of respects.

b) The d e - l i b e r a l i s a t i o n during 1983 of the Compensatory Financing F a c i l i t y (CFF), which one observer has now dubbed 'the f i f t h c r e d i t tranche'.-^^ The underlying philosophy of t h i s F a c i l i t y has always been that i t i s inappropriate to require countries to undertake adjustment p o l i c i e s i n response to f l u c t u a t i o n s i n world commodity p r i c e s , or such other temporary phenomena as harvest f a i l u r e s . I t has always been regarded as an important feature of the scheme that access to the CFF should be as near automatic as possible and access^at least to the f i r s t 'tranche' ( i e . up to 50% of quota equivalent) of CFF drawings^ has never i n the past been subject to much more than pro forma c o n d i t i o n a l i t y . This i s no longer the case. Increasingly countries which wish to draw even the f i r s t tranche are being denied access unless they

already have a stand-by programme i n place or are w i l l i n g to

observe various p o l i c y conditions. Indeed, the B r i t i s h government i s reportedly urging that the CFF be wound-up altogether.

c) The decisions i n 1983 and 1984 to scale down the enlarged access p o l i c y , reducing the normal maximimi s i z e of c r e d i t s that the Fund can o f f e r to members.

d) The r e f u s a l i n 1983 and 1984 to authorise a further a l l o c a t i o n of SDRs, notwithstanding management and independent support for such a move.^S Notwithstanding the d e c l a r a t i o n by the Interim Committee i n 1976 that members should collaborate with the Fund to make the SDR the ' p r i n c i p a l reserve asset i n the international monetary system' i t has remained the small change of the system, cons t i t u t i n g at end-1983 only 2 percent of t o t a l i n t e r n a t i o n a l l i q u i d i t y - a s t a t i s t i c which reveals as bogus the protestations of those who have argued that an SDR a l l o c a t i o n would increase world i n f l a t i o n . ^ 0 A. probably more genuine motive was a desire to avoid the provision of more non-conditional resources to d e f i c i t countries. Given the present-day structure of interna­t i o n a l reserve assets, world l i q u i d i t y i s a l a r g e l y uncontrolled, indeed whimsical, magnitude.

e) The e f f e c t i v e r e f u s a l of the major surplus countries (and of the US as a major d e f i c i t country freed from r e s u l t i n g BoP constraints by the r o l e of the d o l l a r as a reserve asset) to submit to any meaningful su r v e i l l a n c e of t h e i r exchange rate and other p o l i c i e s , as was referred to by the Managing Director i n his address to the 1984 annual meeting.

f) The general decline in the s i z e of the Fund's resources r e l a t i v e to world trade and the stated r e f u s a l of the US administration to countenance any further quota increase u n t i l 1989.

g) The seventh replenishment of IDA at $9bn, regarded by a l l major Bank shareholders except the US as well below the desirable l e v e l ; the subsequent f a i l u r e of attempts to put together a scheme of supplementary financing f o r IDA; and the highly uncertain future of the Bank's mooted special f a c i l i t y f o r A f r i c a . This s i t u a t i o n i s

l i k e l y to have a serious e f f e c t on the Bank's a b i l i t y to provide s o f t loans to low-income developing countries i n support of s t r u c t u r a l adjustment.

h) The known resistance of the US and other i n d u s t r i a l country share­holders to a General Ca p i t a l Increase for the Bank, r a i s i n g the prospect of a very sharp f a l l i n net Bank lending to developing countries during the next two or three years. The lack of support for the proposal to increase the Bank's gearing r a t i o .

i ) The d e c l i n i n g relevance of the GATT, with only about h a l f of world trade covered by i t s mfn rules and the spread of n o n - t a r i f f b a r r i e r s .̂ 3 The r e l a t i v e f a i l u r e of the November 1982 M i n i s t e r i a l meeting, which was unable to agree even upon a s t a n d - s t i l l on the imposition of new n o n - t a r i f f b a r r i e r s , to make e f f e c t i v e progress on a g r i c u l t u r a l protectionism and on the i n c l u s i o n of trade i n services. The tendency i n the US to t a l k of such measures as a general import surcharge and of going i t alone on trade p o l i c y with like-minded states, with i t s grave implications f or the future effectiveness of the GATT as a t r u l y i n t e r n a t i o n a l arrangement.

Each of these items i s f a m i l i a r . What i s important, however, i s to see them in the round, as parts of what amounts to an attack on the foundations of int e r n a t i o n a l co-operation and adjustment. The e f f e c t of these and other p o l i c i e s has undoubtedly been to thrust a larger burden of adjustment - and high-cost adjustment because of the s c a r c i t i e s of supporting finance - onto the d e f i c i t developing countries and thereby to impose an asymmetrical deflationary bias on these countries and, to some extent, on the world econony as a whole, i n stark contrast with the intentions of those who met at Bretton Woods.

Among the consequences of these actions has been the f r u s t r a t i o n of attempts by the Fund and Bank to adapt themselves to meet the changing needs of the system. This was most obviously the case with the 1981 reversal of the l i b e r a l i s a t i o n of Fund c o n d i t i o n a l i t y . It was presumably to t h i s that the Fund was r e f e r r i n g i n the following w i s t f u l plea i n i t s 1982 Annual Report (p.40):

A n o t h e r form o f i n t e r n a t i o n a l c o - o p e r a t i o n i s the s u p p o r t o f member c o u n t r i e s f o r t h e Fund i n i t s c o n t i n u i n g endeavours t o adapt i t s p o l i c i e s and f a c i l i t i e s i n t h e l i g h t o f c h a n g i n g c i r c u m s t a n c e s so a s t o p l a y an i m p o r t a n t r o l e i n p r o m o t i n g and a s s i s t i n g b a l a n c e o f payments a d j u s t m e n t .

I n f a c t , i f we c o n s i d e r t h e Fund's own s t a t e m e n t o f i t s p r i n c i p a l f u n c t i o n s as c o n s i s t i n g o f (a) t h e s u r v e i l l a n c e o f t h e exchange r a t e system; (b) t h e f i n a n c i n g and a d j u s t m e n t of BoP i m b a l a n c e s ; and ( c ) the r e g u l a t i o n o f i n t e r ­n a t i o n a l l i q u i d i t y t h e n i t i s e v i d e n t t h a t i t i s t o d a y b e i n g p r e v e n t e d from u n d e r t a k i n g t h e s e r o l e s e f f e c t i v e l y .

I n the l i g h t o f the i n c r e a s e d v o l a t i l i t y i n t h e w o r l d system o f t r a d e and payments over t h e l a s t decade, t h e a t t a c k on t h e i n s t i t u t i o n s o f i n t e r n a t i o n a l a d j u s t m e n t i s t o be v i e w e d w i t h c o n c e r n . I t means, among o t h e r t h i n g s , t h a t the r i s k s a s s o c i a t e d w i t h p a r t i c i p a t i o n i n w o r l d t r a d e and f i n a n c i n g have grown and t h a t c o u n t r i e s - e s p e c i a l l y t h e weak and v u l n e r a b l e - need i n c r e a s i n g l y t o c o n c e r n t h e m s e l v e s w i t h how t o m i n i m i s e t h e s e r i s k s . C o mparative advantage may no l o n g e r be an adequate g u i d e t o t h e e f f i c i e n t a l l o c a t i o n o f r e s o u r c e s , f o r the t h e o r y of c o m p a r a t i v e advantage does n o t take r i s k minimisation into account. And i n continuing to urge an outward-o r i e n t e d a p p r o a c h t o a d j u s t m e n t t h e Fund and Bank may be i m p l i c i t l y assuming the e x i s t e n c e o f an o r d e r l y and s y m m e t r i c a l w o r l d economic system w h i c h t h e y a r e n o t a b l e t o d e l i v e r .

FOOTNOTES

1. Director of the Overseas Development I n s t i t u t e , London. I should l i k e to g r a t e f u l l y acknowledge the help of Jose-Miguel A l b a l a i n preparing materials for t h i s paper.

2. At the end of 1983 reserves expressed as months of imports held by non-oil developing countries were estimated as follows:

A f r i c a (excluding RSA) 1.1 Asia 3.0 Europe 1.5 Middle East 2.5 Western Hemisphere 2.2 A l l 2.3

(IMF, World Economic Outlook, September 1984; Washington, Occasional Paper No.32, Table 33.)

3. However, t h i s i s not at a l l to suggest that the attempt should be abandoned; i t remains e s s e n t i a l to form the best view that one can, notwithstanding the methodological and s t a t i s t i c a l d i f f i c u l t i e s . For recent contributions to t h i s debate see Donovan, 1982; K i l l i c k , 1984 ch.7; Loxley, 1984.

4. See, for example, the concerns l i s t e d by Please on p.24 below. For another recent account see also Please, 1984b, ch.3.

5. It i s perhaps s i g n i f i c a n t that, for the purposes of s t a t i s t i c a l testing,the World Bank measured s t r u c t u r a l adjustment as "the sum of export penetration and import s u b s t i t u t i o n " - see World Development Report, 1981, p.123.

6. For a f u l l e r discussion of these trends see Inter-American Development Bank, 1984, pp.183-92.

7. See K i l l i c k , 1984, pp.242-6.

8. Sheahan, 1980, notes an apparent c o r r e l a t i o n between s t a b i l i s a t i o n and p o l i t i c a l repression i n countries of the L a t i n American 'Southern Cone' and argues that the socio-economic structures of those countries considerably increased the p r o b a b i l i t i e s of such an association.

9. In the older i n d u s t r i a l countries, of course, i t i s common to provide f i n a n c i a l and other 'adjustment assistance' to industries s u f f e r i n g from de c l i n i n g i n t e r n a t i o n a l competitiveness, and to those who work in them, i n order to reduce the f e l t costs of adjustment and as an a l t e r n a t i v e to a protectionism which a c t u a l l y impedes adjustment.

10. See Schydlowsky, 1982, for a discussion of p o l i c y measures designed to mobilise surplus i n d u s t r i a l capacity i n the adjustment process,

11. This i s one of the p r i n c i p a l themes of K i l l i c k , 1984, chs,6-8.

12. See i b i d , pp.286-7, for a s l i g h t l y f u l l e r treatment of t h i s t o p i c .

13. The average intended duration of stand-by c r e d i t s commenced i n each year since 1980 was as follows:

(months) A f r i c a Rest of world

1980 17.8 18.7 1981 13.0 16.0 1982 12.5 14.8 1983 14.2 15.3 1984 (Jan-June) 13.6 12.4

14. Take, for example, the following figures on the average values of stand-by c r e d i t s agreed with A f r i c a n countries (SDR mn):

1980 63.5 1983 132.3 1981 70.0 1984 (Jan-June) 63.6 1982 87.6

15. For example, Hasan's (1984) review of adjustments i n East Asian countries stresses the b e n e f i c i a l e f f e c t s of p r i c e - c o r r e c t i n g measures.

16. This subject i s discussed i n f u l l e r d e t a i l i n K i l l i c k , 1984, pp.211-12.

17. This i s from D e l l , 1984, who doctaments and discusses the changes i n the CFF.

18. See Williamson, 1984, for a cogent statement of the case for an a l l o c a t i o n .

19. The press communique of the Interim Committee of January 1976 included the following: "The amended A r t i c l e s of Agreement should include a pr o v i s i o n by which the members of the Fund would undertake to c o l l a ­borate with the Fund and with other members i n order to ensure that t h e i r p o l i c i e s with respect to reserve assets would be consistent with the objectives of promoting better i n t e r n a t i o n a l surveillance of i n t e r ­national l i q u i d i t y and making the s p e c i a l drawing r i g h t the p r i n c i p a l reserve asset i n the i n t e r n a t i o n a l monetary system". From IMF 1976 Annual Report, p.123.

20. From data i n the 1984 Fund Annual Report and valuing o f f i c i a l gold holdings at the p r e v a i l i n g market p r i c e , the composition of o f f i c i a l reserve assets at end-1983 was;

Percentages SDRs 2 Other Fund-related assets 6 National currencies:

US d o l l a r 30 other 14

Gold 49

21. The t o t a l value of Fund quotas r e l a t i v e to world trade i s currently about 5 percent, against 14 percent i n 1950 and 8 percent i n 1971, In September 1984 Secretary Regan stated that any suggestion of another quota increase before the due date i n 1989 was "not acceptable" to the US.

22. These issues are present i n ODI, 1984.

23. See Diaz-Alejandro and H e l l e i n e r , 1982, for a discussion of these issues.

24. The conference was, however, given reasons f or b e l i e v i n g that the magni­tude of the deflationary bias may not have been large f o r the world economy i n recent years. This presumably r e f l e c t s (a) the s t i l l l i m i t e d importance of developing countries i n t o t a l world economic a c t i v i t y ; (b) the fac t that at any one time there i s only a l i m i t e d number of IMF programmes i n operation; and (c) that the e f f e c t s of these are often less than intended ( K i l l i c k , 1984). There may also be some problems with the methodology employed i n assessing the extent of deflati o n a r y b i a s .

.25. Cf. IMF Survey 9 February 1981, p.34.

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