Structural Adjustment, Development, and Democracy1

Abstract

Why do structural adjustment programs (SAPs) administered by the IMF and World Bank fail so often? Although different standards have been used to evaluate the impact of SAPs, almost everyone agrees they usually do not improve a country's balance of payments significantly. SAPs were intended to improve a country's ability to earn more through exports over the long run. Yet, SAPs were often unable to flip a country's balance of payments from the negative to the positive. Moreover, in cases where SAPs succeeded economically (achieving a positive balance of payments), they have often done so only in the short run. Why has trade adjustment proven so difficult, even when countries have received substantial external support during the process, provided by international financial institutions (IFIs)? In this essay, we seek to provide an answer on two grounds. First, the economic models behind SAPs rest on unrealistic assumptions about the microlevel processes of trade adjustment. Second, these microlevel dynamics have shaped the domestic politics of structural adjustment. Political opposition often has made SAPs unsustainable. To explain variation in SAP performance, we turn to both economic and political variables. We employ a new model of the domestic distribution of the gains from trade to explain variation in SAP performance across cases. The IFIs base SAPs on traditional models of trade; these models rest on particular assumptions about how adjustment proceeds. Rather than unpack the process, these models gloss over adjustment. The traditional economic models separate macroeconomic forces (such as trade) from microeconomic matters (such as unemployment). Political scientists and policymakers relying on traditional general equilibrium macroeconomic models unwittingly buy into a separation of foreign and domestic policy spheres. This has prevented us from connecting trade with other domestic issues that can critically influence SAP performance. Worse, ignorance of the interrelationships between trade and …