Posted on 2005

Impact of IMF Structural Adjustment Programs (SAPs)
Senator Manuel B. Villar Jr. People's and Parliamentarians' Consultative Assembly on the Debt Crisis
UP-SOLAIR, University of the Philippines Diliman

Congressmen Satur Ocampo, Edcel Lagman, Eduardo Zialcita, Rafael Mariano, and Francis Escudero,

Heads of people’s organizations: BAYAN, ANAKPAWIS, IBON Foundation, AGHAM, and Kilusan Para sa Makabansang Ekonomiya

Distinguished fellow speakers, professors, students, mga mahal kong kababayan,

Magandang umaga po sa inyong lahat.

There is really an active debate on the appropriate scope of IMF policy conditionality, particularly the role of structural policies in IMF-supported adjustment programs.

Structural policies are usually aimed at reducing/dismantling government-imposed distortions or putting in place various institutional features of a modern market economy. This include:

  • Financial sector policies
  • Liberalization of trade, capital markets and of the exchange rate system
  • Privatization and public enterprise policies
  • Tax and expenditure policies
  • Labor market policies
  • Pricing and marketing policies
  • Transparency and disclosure policies
  • Poverty-reduction and social safety-net policies
  • Pension policies
  • Corporate governance policies (including anti-corruption measures)
  • Environmental policies

The objective of these policies is to improve the efficiency of resource use.

During the Asian crisis, the worry over IMF policy recommendations deepened and developing countries began feeling the recommendations are costly and intrusive.

But why do developing countries still borrow from the IMF? First, the cost of borrowing from the IMF is much lower than the cost of borrowing from private sectors especially in crisis times. Second, most developing countries borrow only when their BOP problems are already severe, hence the shadow price they put on policy conditions associated with IMF borrowing is low. The promise of an IMF bailout insulates financiers and politicians from the consequences of bad economic and financial practices, and encourages investments that would not otherwise have been made. As the lender of last resort, the IMF can lull economies into complacency.

Experience with IMF policies

Emphasis on non-liquidity scenario. The case of Korea is cited in showing that less emphasis on structural reforms would have resulted in a softer crisis (in 1997) because Korea’s solvency was never the question. The IMF, however, generally insists on deeper reforms in cases of non-liquidity rather than insolvency. Hence, the prescription for Korea to undertake non-liquidity structural reforms as a solution to the crisis was a mistake. The non-liquidity branding also sent the wrong diagnosis of the Korean problem to private investors, thus, making difficult restoring investors’ confidence in its economy.

It was argued later on that no country is without some structural weakness and desirable structural policy reforms are okay for improved economic performance over the long-term, but not during a crisis where short-term solutions are needed.

Equal treatment of countries. This is one of the IMF’s key operating principles, but it has not adhered to it. As Paul Volcker (currently President of the New York Federal Reserve Bank, former chairman –1979 to 1987 - of the Board of Governors of the Federal Reserve Systems and former Undersecretary of the Department of the Treasury) put it, “When the Fund consults with a poor and weak country, the country gets in line. When it consults with a big and strong country, the Fund gets in line.” While it is true that there are real differences in economic and political power among countries, directing a developing country to adopt structural requirements that will not be asked of a developed country emasculates the host country.

Straying outside its competency areas. The core competence of the IMF is in macroeconomic and exchange rate policies. There are other international financing institutions that address the other core policy areas like environment, corporate governance, and trade. That is the order among these institutions – each one would have a comparative advantage over the other so funding and support for their causes would be efficiently distributed. But now the IMF has also gone into these other areas even when its resources are not adequate to respond effectively to them – straying into the core competencies of other institutions and effectively affecting their support systems.

Critics of the IMF and the World Bank blame the two for the bank crisis in Asia, particularly in Indonesia. The IMF is said to have bungled the bank closures and precipitated the credit crunch in the crisis-affected countries when it required an unjustifiable and overly rapid increase in banks’ capitalization.

Requiring 50 or more qualitative conditions. With the number and multiplication of structural performance conditions, the specification of “micro” policy measures, and the increasing reliance on (qualitative) structural benchmarks and program reviews, IMF borrowers become confused in the implementation as the “message” becomes muddled and muddled throughout the onerous and excessive criteria. Rather than being incentives, the conditions become more as deterrent to performance.

Anti-Poor?

The Bloomberg featured in November 2000, the findings of a study by World Bank economist, William Easterly, on the “fighting poverty” mission of the IMF and the World Bank. Mr. Easterly concluded that his main result is that IMF and World Bank adjustment lending lowers the growth elasticity of poverty (the amount of change in poverty rates for a given amount of growth)” and that “economic expansions benefit the poor less under structural adjustment”. Bloomberg paraphrased this as “(T)he poor in developing countries are often better off when their governments ignore the policy advice of the International Monetary Fund and World Bank”. Mr. Easterly listed Zambia and the Philippines as two of more economies that have received a lot of IMF funds but are worse off.

The study cites fiscal adjustment implemented through increasing regressive taxes like sales taxes (or in the Philippines’ case, VAT) or decreasing progressive spending like transfers as one example of IMF’s structural adjustment program that disproportionately hurts the poor as they in effect lower the benefits to the poor of mean income growth. It also said that if the poor in the borrower-country are not tightly linked to either the expanding newly favored formal sector or the contracting previously favored formal sector, then the amount of poverty change for a given amount of output change may not be very high under structural adjustment.

The Philippines’ experience with IMF

Philippine poverty levels. The Philippines has been borrowing from the IMF for over forty years now. Even without applying strict business and economic theories, but just plain common sense, a forty-year loan relationship should be showing significant reduction in poverty in the country now as the IMF and the World Bank invoke. In 1965, 48% or 18 million Filipinos were living below the poverty line. In 1983, it went up to 70% or 35 million Filipinos beyond the poverty line. Last 2003, the government reported that only 26.5 million Filipinos or 34% are poor. However, this figure is seriously doubted in view of the current government’s penchant for changing its accounting parameters to soften figures. Furthermore, even the government is first to agree that rural incomes have generally gone up this period attributable to the good weather and the China market.

In 1998, during the heat of Argentina’s rebuff of IMF conditions, the British bank Standard Chartered warned of Argentine-like conditions in the Philippines. But the government did not take heed. Columbia University’s famed economist, Jeffrey Sachs had recommended as early as 1986 to Philippine economist Solita Monsod for the Philippine government to look into the country’s odious debts. Again, the Philippine government did not act on the recommendations of Drs. Sachs and Monsod.

The rising debt ratio

In 1994, the government spent P17 for interest payments for every P100 of government revenues. In 2003, interest payments grew to P28 for every P100 of government revenues. For 2005, debt servicing is P40 for every P100 of government revenues.

Last November 17, 2004, the IMF Mission issued a statement at the conclusion of the 2004 Article IV Consultation and Post-Program Monitoring Discussions with the Philippines. Part of this statement read:

“The new government …are to be commended for their initial focus on legislative tax measures and efforts to bring these quickly for congressional approval. xxx However, the legislative process for the administration's proposed tax measures is still at an early stage, and some of these measures are proving to be contentious. This has led to signs of impatience in financial markets, with sovereign spreads edging up and ratings agencies warning of possible downgrades.”

As far as the IMF is concerned it seems, the ills of the economy are the Congress’ fault.

Our options

Other regional lenders. The Philippines can follow the footsteps of Malaysia in 1998 when it became one of the first beneficiaries of low-conditionality Miyazawa Initiative funds or other regional official lenders with easier policy conditionality. In fact, there is talk about Asian countries may elevate the infant Chiang- Mai swap arrangements into a full-fledged Asian Monetary Fund and will no longer need to go to the IMF.

My proposals. After so much has been said about our debt situation, I believe concrete actions must already be done instead of just talking about it. I have already filed the Debt Cap Bill (SBN 510) and the Finance Committee (my committee) has already heard it initially. Hearings will resume in the next coming days, and I am confident it will be passed. This will effectively put a ceiling on public sector borrowings, including contingent and assumed liabilities incurred.

My second action follows a line of thinking that economic and financial experts have leveled on the Philippine government but has been generally ignored. I have filed this morning Senate Bill No. 1928 a Bill creating a Council for Debt Relief. Once passed, the Council, which shall be composed of public and private sector “negotiators”, shall be convened to review bilateral loan agreements entered into by the Philippine governments past and present and invoke the relevant clauses that would facilitate cancellation of odious debts and/or restructuring of debts to ease debt payments. Its function would be similar to what the GRP Peace Process Panel is doing but with better and tangible results.

I believe that with these two bills, we shall be able to address the more pressing internal and external flaws in our debt systems. Then the rest of the problems would be easier to address.

I thank you for the opportunity to address you all this morning. Maraming salamat sa inyong pakikinig.

Magandang umaga muli sa inyong lahat.

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