Abstract
This article argues that the Economic Adjustment Programmes (EAPs) that came with loans to peripheral Eurozone members Greece, Ireland, Portugal, and now Cyprus, are very similar to the loans with conditionality, also known as Structural Adjustment Programs, that international financial institutions used as a policy tool in the 1980s and 1990s. It defines structural adjustment programs and then shows how Eurozone rules plus the EAPs resemble them. It then canvasses the literature evaluating structural adjustment in the developing world in order to formulate expectations for its performance in Europe. The conclusions from the large literature on structural adjustment policies suggest that the EAPs will: be badly implemented; be neutral or bad for growth; be bad for equity and the poor; have unpredictable policy consequences; and will allow incumbent elites to preserve their positions. Preliminary evidence from the four peripheral countries confirms that the same problems are afflicting EAPs.
Introduction
The presence of an emergency team from the International Monetary Fund (IMF) is rarely a sign of good news for a government. With the sovereign debt crisis in the Eurozone, IMF crisis teams, absent for decades, have reappeared in Eurozone capitals as part of a ‘Troika’ of the IMF, European Central Bank, and European Commission. The Troika is formulating and monitoring the implementation of policy changes that are the price for bailout loans to the crisis-ridden governments of Greece, Ireland, Portugal, and Cyprus.
This article argues that the conditions they are enforcing, known as Economic Adjustment Programmes (EAPs), 1 are very similar to the packages known as Structural Adjustment Programs (SAPs), that were applied in the 1980s and 1990s by the international financial institutions (IFIs), such as the World Bank and the IMF when extending loans to countries whose salient characteristic was their inability to repay. 2 EAPs and SAPs are similar instruments: concentrated lists of reforms that come as the price of financial rescue. They contain much substantive similarity and employ underlying approaches to the state. They come amidst shock, and might have shock effects themselves. As a result, they can be studied as a policy instrument and we can infer the likely effects of EAPs from the experience of SAPs.
This article first explains what SAPs were. It then reviews the four EAPs, finding that they contain very similar provisions. This is followed by a review of the large literature on the effects of SAPs, most of it published in the early 1990s. That literature found them disappointing to borrowers and lenders alike – with mediocre growth effects, patchy compliance, bad effects on equity, solidarity and health, and unhealthy effects on political systems. Provisional evidence suggests that these effects are indeed visible in the EAPs. The adoption of EAPs might just be adding confirmatory cases to a largely negative literature on structural adjustment – and undermining the European Union’s legitimacy and the four states’ economies, without resolving underlying problems.
There are clear differences between the polities and economies that had SAPs in place in the 1980s and 1990s, and between the polities and economies that are currently in EAPs with the IMF, European Central Bank (ECB), and European Commission today. What is consistent is the use of the policy instrument: conditional loans, used by international governmental organizations to promote a consistent list of economic policies. A literature on policy conditionality that covers countries as different as Niger and South Korea already spans quite a range of societies and might therefore shed light on the characteristics of the instrument and the policy ideas that would also cover the Eurozone experiences.
Conditionality and Structural Adjustment Programs
Conditionality is obviously not good from the standpoint of democracy or national sovereignty. The governments of Greece, Ireland, Cyprus, and Portugal ceded autonomy over large areas of their budgets, policies, and economies to a Troika of organizations with very limited democratic accountability: a European Central Bank shielded from politics, accountable to central banks and bound by strict treaty limitations; an IMF that is formally accountable to its shareholder governments; and a European Commission that is closer to European voters, but still only indirectly accountable to governments and the European Parliament. The justification for the EAPs was not democracy in Europe. It was debt, and the enormous sums of money other countries were contributing to service the four countries’ debts. That makes the basic politics of EAPs, and the specifics of the policy instrument detailed here, similar to that of structural adjustment. They are uses of conditional loans to change policies.
Conditionality stems from the fact that the IFIs are making loans that nobody else would make, to countries that must accept such loans, and their conditions, because there is no alternative. In theory, if a loan comes with the right conditions it can have a good chance of repayment, avoid moral hazard by ensuring that bailouts do not come for free, and force necessary restructuring on the troubled countries. The IFIs set conditions and monitor progress, withholding ‘tranches’ of the loan until the debtor country achieves certain tasks.
Conditionality can take a number of forms. SAPs were the principal form of policy conditionality used by the IFIs from about 1982 to 2000. 3 SAPs formed a coherent agenda, grounded in neoclassical economics, that sought to make economies stronger and more stable by reducing the size of the state, promoting exports, and making more use of price signals in the economy. John Williamson famously summarized the agenda in his paper on the ‘Washington consensus’ (1990). The consensus meant a set of objectives popular in both American politics and the IFIs: limited deficits, free trade, market-set interest and exchange rates, deregulation, openness to foreign direct investment, privatization, government expenditure focused on a few areas, tax reform, and property rights.
Not long after he formulated the consensus, a variety of critiques began to affect both the substance and the process of conditionality. Procedurally, compliance with conditional lending turned out to be poor; it turned out that if implementing countries lacked a sense of ‘ownership’ of reforms, compliance and implementation were problematic (Babb and Buira, 2005; Kapur, 2005). The result was a series of efforts to reduce conditionality as a policy tool, which had limited effect (Bird, 2009; Killick, 2002). Even if elites felt ownership, structural adjustment left out women, the poor, and other groups affected (including, in many cases, legislatures and line ministries) in favor of narrow government–IFI dialogues (Babb, 2009; SAPRIN, 2004; Woods, 2006). Substantively, outside critics rejected the priorities and outcomes of structural adjustment, and the World Bank, in particular, responded to the disappointing results of much structural adjustment with a new focus on ‘governance’ (World Bank, 1992; see also Marshall, 2008: 40–41) and some more generous social policy ideas (Mahon, 2010). Such shifts did not change the IFI’s basic accountability to capital markets, the United States, and other rich countries (Gould, 2006: 5–13), but did complicate their work and accountability (Weaver, 2010). The result was that the Washington consensus had, by the 2000s, started to look like the ‘Washington Confusion’ (Rodrik, 2006).
Defining Structural Adjustment Programs
The contents of structural adjustment policies have been rehearsed multiple times. As Weaver (1995: 9–11) summarizes, they involved: (1) realistic exchange rates, whether floating or fixed; (2) trade openness, including FDI openness; (3) liberalization of domestic trade and commerce ‘by removing price controls, reducing regulatory rigidities, eliminating legal monopolies, and by improving the economic functions of government so that private enterprise can flourish. A very important element in this reform is to change the relative prices of capital and labor so that interest rates are relatively higher, and wages are relatively lower’; (4) reform of fiscal policy, including reduction in subsidies, broadening the tax base, and reducing taxes, as well as decentralization of expenditure and tax raising to local governments; (5) the closing or sale of state-owned enterprises; (6) reform of the financial sector, including regulation of financial enterprises and market-determined interest rates; and (7) sectoral reform of areas such as agriculture, industry, health, and pensions. The specific measures tended to come in roughly that sequence – from emergency medicine (devaluations) that can be implemented with a ‘stroke of the pen’ to surgery (building markets) to building pro-market and therefore presumptively pro-growth institutions in areas such as taxation, regulation, and economic sectors.
Economic Adjustment Programmes’ resemblance to Structural Adjustment Programs
Like SAPs, the EAPs came in the wake of financial crises in which governments’ relatively successful efforts to cut expenditures on their own had been swamped by plummeting tax revenues in a financial crisis that damaged their ability to service debt while leaving them with private sector liabilities. The European sovereign debt crisis that began in 2010 has been the subject of a large number of histories and commentaries (notably Bastasin, 2012). While countries fell into crisis for diverse reasons, in each case their governments lost the ability to credibly sell debt at reasonable interest rates at the same time that their economic growth ceased.
The diagnosis of the underlying problem was not quite the same as the one addressed by the Washington consensus. If the Washington consensus was supposed to be a treatment directed at weak growth in poor countries, the European efforts were directed at high debt in rich countries. The adopted treatment was therefore debt reduction combined with proposals justified by longer-run growth. It was advocated most prominently by Harvard economist Alberto Alesina and his Goldman Sachs colleague Silvia Ardagna, especially in a 2009 paper. The approach was nicknamed ‘expansionary austerity’ and argued that governments could create growth by cutting expenditure, since reduced expenditure would improve business confidence in a stable future, thereby increasing investment and hiring while reducing interest rates. It naturally found some echo in Europe’s political right (e.g. Liberals and Christian Democrats) which was in power in most states and dominated the European Commission and Parliament; some peripheral countries with right-wing governments also adopted it with enthusiasm. It also had appeal in a Eurozone system that discouraged activist monetary policy and in countries with, often, high taxes that had been theoretically committed to fiscal policy rigor through a Stability and Growth Pact since the Maastricht Treaty. It also found reinforcement in a famous analysis by two other economists, Reinhart and Rogoff (2010), who found that countries above a 90% debt-to-GDP ratio had slower growth – again, an implicit case for generating growth by addressing the debt problem that was also causing the financial crisis. While both papers have been hotly contested since then on the grounds of biased case selection (including by the IMF: Guajardo et al., 2011) and the Rogoff–Reinhart paper turned out to have especially serious problems, they formed the intellectual justification of the European response at the time.
If the economic problem was debt combined with worryingly low long-term growth trajectories, and the political problem the nervousness and impatience of Troika lenders (politicians in contributing countries, notably Germany, were worried about the popularity of bailouts; the IMF was worried about the scale of its lending to Greece relative to other countries and private banks’ exposure; and the ECB’s participation was hardly envisioned in the EU Treaties), then the response was policy aimed at cutting deficits rapidly – which, Alesina and Ardagna suggested, would resolve the problem of the weak growth trajectory. Given that large loans were needed to keep the peripheral states in the Eurozone, policy conditionality beckoned.
Thus were born the EAPs, conditions on the loans extended by the Troika. At the time of writing, Cyprus, Greece Portugal, and Ireland have EAPs, while Spain has specific financial sector conditions; this article, because of its focus on a particular mechanism, does not address austerity politics and policies outside the four countries with existing EAPs. 4
The seven-point definition of structural adjustment above, from Weaver, suggests that there is a useful comparison. 5 The first two points in the definition were realistic exchange rates and openness to trade and FDI. While the realism of the Euro as a currency for peripheral Europe might be debated, exchange rates and trade openness are settled if the Eurozone remains intact. The third, liberalization of domestic trade and commerce, was partly achieved by many different EU laws, much rehearsed in the EU studies literature that focuses on all the ways the EU promotes market integration (Scharpf, 2002) – although the EAPs contain many different liberalization programs, which (following the internal structure of the EAP documents) are discussed here under sectoral programs. The next four points of the definitions of SAPs constitute the additional structural adjustment in the EAPs: fiscal policy reform, reform of state-owned enterprises, financial sector reform, and market-promoting sectoral reform.
Fiscal policy reform
Reform of fiscal policy involves reforming taxes to produce revenue and steer economic activity while reducing government expenditure. In Europe, the effect of the consensus that the problem was debt, and Alesina and Ardagna’s work (2009), was to make this a centerpiece of the EAPs. In Greece, it meant explicit commitments to raise the retirement age past 63 and cut public sector wages and pensions (European Commission, 2010a: 15). These cuts mostly took the form of eliminating bonuses that effectively paid civil servants and pensioners for 13 or 14 months a year and replacing them with substantially smaller flat sums. The first EAP called for the organization of pensions to be streamlined, and both called for higher taxes and a particular emphasis on taxing the wealthy and the self-employed; the Greek tax collection system is not known for being efficient.
In Portugal, the EAP did not call for individual large cuts such as those to the Greek pensions and public salaries. Rather, it called for a lower public sector wage bill, specifying wage and promotion freezes and a gradual reduction in staff; more efficient administration; lower and shorter-term unemployment benefits; cuts in capital spending; and smaller transfers to local and regional governments and state-owned enterprises (European Commission, 2011b: 20). Portugal’s EAP diagnosed serious competitiveness problems and consequently also called for lower social contributions (European Commission, 2011b: 24), which helps explain the focus on sectoral policies such as health care (below). The measures amount to a one-year cut of 2.1% of GDP from the public sector in 2012, combined with a 0.9% tax increase, followed by a further 1.9% of GDP cut in the deficit from public sector contraction and tax increases in 2013 (European Commission, 2011b: 35).
In Ireland, the EAP is somewhat less detailed and prescriptive. The EAP agreed a large reduction in expenditure, especially cuts in capital spending, and a variety of tax increases. Controlling public sector expenditures took place through a wage freeze and voluntary retirements in the public sector (European Commission, 2012a: 24) as well as efforts to reduce certain social benefits thought to make the labor market rigid and encourage voluntary long-term unemployment.
In Cyprus, by contrast, fiscal policy is central, both because of the objective of a 4% primary budget surplus and because of the association between Cyprus and questionable banking practices (European Commission, 2013a). Cyprus is heavily critiqued for having neither budgetary rules nor a medium-term budgeting procedure, and is to create one urgently (European Commission, 2013a: 49–53). Its civil servants are to have both limited pay, a new wage-setting framework for the public and private sectors, and urgent reforms to working time rules that create large overtime payments and interfere with managing; there is also to be a better pay system that reflects performance. Given the context of the Cypriot EAP, which has included much discussion of its banks’ role as conduits for international money and possibly tax evasion, the discussion of tax reform is particularly tough. It focuses on improved collection and, in particular, less openness to questionable transactions, such as through more clarity about asset ownership (European Commission, 2013a: 87–90); the whole document is quite explicit that Cyprus will have to find an economic model other than offshore finance.
Unlike the others, the Cypriot EAP takes direct aim at eligibility for major welfare state programs, notably health. Until the Cypriot crisis began, the EU had been advocating for Cyprus to hurry the development of a more universal and efficient health care system (Cylus et al., 2013), but the EAP modified the EU’s requests, including by trying to equalize access and imposing a contribution on civil servants while introducing a range of new co-payments for corruption-prone services that were deemed overused (such as emergency facilities or laboratory tests) and which in some cases were open to conflict of interests (European Commission, 2013a: 48–49). The EAP summarizes: ‘The adjustment should be focused mainly on the expenditure side, in particular on cuts of the public sector wage bill, social benefits and discretionary spending, while minimising the impact of consolidation on disadvantaged’ (European Commission, 2013a: 47).
Reform of state-owned enterprises
The closing, privatization, or reform of public enterprises is the next part of the definition of an SAP. Greece had a long list of such enterprises to be privatized, including its strikingly loss-making railway system as well as a list of organizations responsible for horse racing, thermal buses, and trolleys (European Commission, 2010b: 53). Privatizations were concentrated in transport. By and large, they fit with coming or existing EU legislation on transport (which had not necessarily been well implemented in Greece).
In Portugal, the EAP identified state-owned enterprises as a major drain on the budget. Portugal’s EAP was less prescriptive than Greece’s. By the third (winter 2011/2012) review, the government was committed to sell its stakes in the energy sector as well as firms as diverse as the airline TAP, the postal service, and some nationalized finance companies (European Commission, 2012b: 27–28). In Ireland the National Asset Management Agency (NAMA) was a very large state-owned bad bank made up of the assets from failed financial institutions, and the EAP focused on disposing of its assets at a reasonable price and in time.
The discussion of Cypriot state-owned enterprises sounds much like the discussion of the Greek ones, but with even more emphasis on weaknesses in their accounting (perhaps reflecting the experience of Greece) (European Commission, 2013a: 85–86). Cyprus is to establish an inventory of them as a prelude to reform or privatization, and strengthen their governance (the exact problems are not specified but can be imagined). The list of state-owned enterprises to be sold includes the ports, telecommunications, and energy monopolies; privatization should come with the establishment of appropriate regulators. The EAP makes it clear that there is much scope for privatization and reform of Cypriot public enterprises.
Financial sector reform
The sixth characteristic of SAPs is reform of the financial sector, including better regulation and market-determined interest rates. In the EAPs, this has also meant various levels of subsidy and public assumption of financial sector losses (in contrast to the otherwise firm focus on reducing government liabilities). In Greece, both EAPs called for substantial support to bank liquidity, the creation of a Financial Stability Fund to buttress private banks against anticipated worse losses, and better bank regulation – better information for the regulators, and an increase in their capacity developed on the advice of the IMF and ECB (European Commission, 2010a: 24; 2012c).
In Portugal, the EAP’s financial sector reform called for better bank funding – as compliant with the European Commission’s rules on state aid. In Ireland, private bank liabilities are at the center of the EAP and their management is a large part of it through a long series of initiatives intended to produce ‘a lean and strong banking sector’ with more prudential capital and revised bankruptcy law underpinned by a large fiscal facility (European Commission, 2011b: 23–26). Cyprus rivals Ireland for the largest banking problems relative to its GDP, and before the EAP was signed one of its big banks (Laiki) had been resolved, at cost to depositors and shareholders, and merged into the larger Bank of Cyprus. The EAP is clear that a smaller and more tightly regulated Cypriot financial sector is a policy objective, which would also (combined with improved fiscal policy) mean the definitive end of Cyprus as an offshore financial sector (European Commission, 2013a: 41–44). At the time of writing Cyprus is still under a formal regime of capital controls, which the EAP stipulates until other financial reforms have strengthened bank solvency.
Market-promoting sectoral reform
The seventh characteristic of SAPs is sectoral reform that involves specific recommendations in sectors such as health (Fahy, 2012) or transport, subsuming market promotion. In all three cases, the sectoral programs carry out the agenda of promoting domestic markets and a smaller state. In the case of Greece, the first EAP meant an ‘ambitious’ set of labor market reforms. These included the reduction or elimination of sector-wide bargaining, ending the extension of wage-setting agreements across entire sectors. Out of the sizeable body of EU law with which Greece was noncompliant, it involved implementing services liberalization, including its extension to professions such as lawyers and doctors, and law on the liberalization of electricity, transport, and gas markets (European Commission, 2010a: 22–23). Each report on the EAP underlines the analysis that inefficiency –barriers to entry and inefficient monopoly parastatals – in these sectors is a major reason that Greece is not competitive, though there was no clear explanation of how supply-side initiatives in these sectors would pay off in the 18 months that the first EAP expected Greece to be off international debt markets.
Beyond pensions, the Greek EAPs also addressed tax collection, a notorious problem in Greece, and the often-corrupt health sector. The health sector emerged as a problem after the first EAP, and so the policy adjustments in the second EAP were detailed: consolidation of health responsibilities into the Ministry of Health; consolidation of purchasing into a single organization; and very detailed policies intended to address what turned out to be a staggering level of overpayment for pharmaceuticals (including electronic prescription, prescription by active ingredient permitting generics substitution, monitoring of doctors and pharmacies, and major cuts in the prices charged by pharmaceutical firms) (European Commission, 2012c: 37; 2013b).
In Portugal, the EAP is long and prescriptive on the subject of labor law. Identifying a range of what it calls ‘Southern European’ labor market issues, it calls for reduction of duality, more firm-level wage-setting, and more incentives to work. Detailed measures include easing rules on employee dismissal, increasing flexibility on working time, more firm-level union bargaining and exemptions to sectoral bargaining agreements, shorter and lower unemployment benefits, and active labor market policies to encourage the jobless into work. It includes some complex local policy areas, such as urban rent control (Associated Press, 2012). It also includes obligations to make public–private partnerships good value (hiring outside accountants to review the contracts), to monitor local government spending and reorganize regional governments, and a string of initiatives in health care that include most internationally current ideas, including: e-prescription and electronic medical records, better purchasing and procurement, changes in co-payments, tougher purchasing from pharmaceutical companies that were charging high mark-ups, and a range of quite technical items including the development of clinical practice guidelines (European Commission, 2011b: 21). The health section stands out for both the precision and the ambition of its goals.
In Ireland, labor reforms are fewer and less prescriptive (perhaps reflecting Ireland’s better compliance with the ideas before the crisis). It involves a 12% cut in the minimum wage, reviews of sectoral wage agreements, reviews of the income security mechanism to remove incentives to worklessness, and more active labor market policies as well as measures to improve competition in ‘product, and energy markets and other network industries’ such as gas and electricity, where it also suggests more privatization (European Commission, 2011a: 34–36).
In Cyprus, market-promoting sectoral reform includes the common prescription that energy markets should be liberalized, and otherwise focuses on liberalization and changes to wage-setting mechanisms. These were spelled out in some detail (European Commission, 2013a); the keystone was a commitment to eliminate fixed cost of living increases for public employees, and to start a tripartite negotiation to remove them in the private sector in order to lower the cost of labor. There were also general commitments to open up access to protected regulated sectors, review public–private partnerships, and speed up the problematic Cypriot title transfer system (European Commission, 2013a: 53).
Summary
The Eurozone states were in part structurally adjusted by the time the first Euros came into circulation, which is probably why the tales of technocrats and external constraints in the run up to 2000 (catalogued by Dyson and Featherstone, 1999, among others) sound quite a lot like the stories reported in studies of structural adjustment (see, for example, Teichman, 2001: 9; Woods, 2006: 76). Nevertheless, five of the seven aspects of structural adjustment can clearly be found in the EAPs. The two that are missing in the Eurozone context are realistic exchange rates (due to the currency union) and policies to promote trade openness (already largely legislated in the EU).
Notably, all of them contain some traditional remedies: in rigid Greece and relatively liberal Ireland alike, they call for labor market liberalization, firm-level wage-setting, reducing disincentives to work, and liberalization of energy and transport markets. Where there are significant state-owned enterprises, especially in transport, their privatization is suggested. Education policy receives little attention, and local governments are mentioned mostly for unspecified cuts, while health care has fairly detailed initiatives. There are facilities to rescue and oversee private banks, which are in trouble in each country.
Finally, if not part of the definition of SAPs, it is noticeable that the context of the EAPs is quite similar in one other way that probably shapes their content. Political science research finds the SAPs, like the EAPs, are heavily influenced by banks whose capital is necessary if the programs are to work. It seems that, just as in the EU, the need to please external debt holders and potential investors expands and toughens conditionality as the IFIs try to make sure the reforms will produce the investment needed for growth (Gould, 2006: 25). Newer research suggests that countries whose banks concentrate risk from a given country will also seek extra conditionality as protection for their banks (Copelovitch, 2010: 7) – and also be less likely to punish noncompliance (Breen, 2012). This is certainly a dynamic that is visible in the Eurozone, where interbank sovereign lending is a major part of the peripheral debt, and concentrates peripheral country risk in German and French banks (Chen et al., 2012: Figures 6–10). Adding stern conditionality while being especially forgiving of noncompliance seems unlikely to produce satisfactory results for anybody.
What to expect from structural adjustment
The experience of structural adjustment touched many countries from the early 1980s to the formal end of such programs in 2000 and produced an ample literature spanning several disciplines. This section summarizes the findings: what happens when loan conditionality from outside financial agencies tries to achieve some or all of the seven things identified in the SAPs and EAPs? It is based on a literature review in December 2012–January 2013, using a keyword search on the phrase ‘structural adjustment’, ‘world bank’, and ‘IMF’ in ISI’s Web of Knowledge, cross-checked with bibliographies from the publications, Google Scholar, and Google Books and restricted insofar as possible to peer-reviewed publications.
SAPs had severe implementation problems
The first problem – and one that seems particularly pertinent to the Eurozone at the moment – is that many debtor countries failed to fulfill the conditions of their loan (Kapur, 2005). For much of the classic era of structural adjustment, scholars had to infer the extent of noncompliance, but data have become more available since the early 1990s. What is clear, however, is that it was extremely common for countries to fail to comply with their loan conditions (Killick, 2006). Furthermore, noncompliance at a level visible to the IFIs is probably only a subset of the total noncompliance, since the IFIs were not able to track much beyond formal policy in the capital city. This produced a methodological debate: if a country in structural adjustment partially complied and did badly, was that because it complied with bad policies (as the World Bank concluded) or was it because it didn’t comply enough with good treatment (as the IMF often concludes) (Rodrik, 2006: 976–977)? Noncompliance studies became so common as to almost constitute a subfield of political science (Vreeland, 2007: 95–96).
A World Bank evaluation of policy conditionality concluded that, ‘Conditionality as we know it does not work. If the policymakers are persuaded, conditionality is not needed, and if they are not persuaded, conditionality does not work’ (Chhibber, 2006: xxiii). Compliance, Dollar and Svensson of the World Bank found, is highly variable and depends on domestic politics above all (Dollar and Svensson, 2001). Furthermore, the politics of conditionality themselves tend to pit debtor governments against IFIs that are ostensibly concerned for the people’s welfare: ‘Since Fund negotiators virtually define their role as extracting the maximum possible reform, governments will inevitably be placed in the role of opposing reform at the margin’ (Collier and Gunning, 1999: 649).
SAPs were at best mediocre for growth
There is much argument among economists about their effect, but there are few data showing that SAPs actually led to improved economic growth (Stein, 2008: 55–84). The headline is that African states in structural adjustment went backwards during the 1980s in GDP (Adedeji, 2002) and poor countries as a whole did little better (Woodward, 1992a: 96–97); SAPs at the very minimum did not compensate for other problems. More focused econometric studies also found that they were at best mediocre for growth (Crisp and Kelly, 2002; Greenaway and Morrissey, 1993: 251) or negative (Bradshaw and Huang, 1991). Over a shorter time frame, a study that found better growth on average also found major dispersion, with good outcomes driven by developmental states such as South Korea whose success might not be due to SAPs (Mosley and Toye, 1988: 410).
Schatz, analyzing World Bank data, divides the effects of SAPs into several categories; in the category that most closely resembles the EAPs, ‘fiscal balance’, conditionality in the SAPs produced an almost even divide between countries whose primary balance improved and those for whom it deteriorated, and there was no relationship between fiscal balance and economic growth (Schatz, 1994: 684). Noorbahksh and Paloni find that countries that complied well had better macroeconomic outcomes – a somewhat double-edged finding given the poor compliance detailed in their article and elsewhere (Noorbakhsh and Paloni, 2001). Killick found that while some macroeconomic variables improved, the positive effect of IFI conditionality on growth was weak (Killick, 1995a: 67–75).
What the outsider concerned for applicability to Europe might note is that the studies seem to either find that there is little to no aggregate benefit in terms of growth (and ability to repay debt), or growth is an average out of highly dispersed outcomes that seem to depend on compliance and growth that is rather unpredictable. Easterly, further, points out that many of the SAPs were for the same countries, seemingly stuck in cycles of intervention. The very need for repeated courses of the medicine suggested a problem with the treatment for at least some patients (Easterly, 2005). Consistent poor performers stayed that way, and dragged down average growth rates (Kakwani, 1995: 495) – which might give pause, given the documented and largely unexplained Greek, and occasionally Portuguese, ability to ignore compliance with EU law over decades (Falkner et al., 2007). All of this suggests that there is no good reason to expect that EAPs will reliably produce growth.
SAPs were bad for inequality, health, and social cohesion
In general, SAPs were associated with increased inequality, according to both cross-national quantitative data and country case studies (Mensah, 2006: 273; SAPRIN, 2004; Stein, 2008: 55–84; Stewart, 1991). The mechanisms varied. Lowering formal wages – whether in protected sectors, or set by unions, or minimum wages – naturally damaged the welfare of many. Public sector reductions also often reduced the wages of less-skilled workers. Trade openness led to layoffs in uncompetitive trade-exposed sectors while cutbacks in government expenditure hurt government employees (Lopes, 1999) and those who depended on them (Blouin and Bhushan, 2009; Woodward, 1992b: 225, 248). Even if the effects were short-term (Killick, 1995b), the consequences could be dramatically negative for the poor (Weissman, 1990).
Gini coefficients of inequality worsened throughout the decade of structural adjustment (Babb, 2005: 211; Laurell, 2000: 310; Van der Hoeven, 2000). Other studies also found an increase in inequality from those policies (Crisp and Kelly, 2002; Easterly, 2003).
A separate literature evaluates the impact of SAPs on health, with the starting point that health is not just affected in the same way as any other form of wellbeing, but that many events in the life course cannot be deferred in response to economic policy (e.g. intrauterine development, old age, disability) (Peabody, 1996). Structural adjustment’s promise of later growth from a return to economic virtue is undercut if it implies a long-term loss of welfare from cutbacks to health and preventative services. Budget cuts, user fees, and privatization all had negative and immediate effects on health and health care, including dramatic policy failures such as user fees at HIV/AIDS clinics that deterred testing and exacerbated the spread of the disease (Stein, 2008: 207–235). The short-term consequences for health indicators and health systems can often have effects lasting the lives of those affected, for example in lost productivity and healthy life years as well as human happiness and capability (De Vogli, 2011; Ruckert and Labonté, 2012). In short, there is no evidence to expect that EAPs will have desirable effects on inequality, poverty, and health; their long-term benefits would come through economic growth, and are uncertain, whereas the short-term costs appear difficult to avoid.
SAPs did not destabilize entrenched elites
One of the hopes attached to SAPs – though not expressed in formal documents – was that they would destabilize the corrupt elite networks and clientelistic systems that are characteristic of politics in many countries (Herbst, 1990). Notionally, cutting off sources of unconstrained public expenditure would undermine clientelistic networks and reduce the ability of elites to maintain political machines. It also frequently meant specific favored sectors of society such as miners, urban populations, or users of a given public service such as electricity would lose their benefits and thereby break up relationships with corrupt politicians that they supported. Similar thoughts have been expressed about the various Eurozone states in trouble, particularly about Greece and Cyprus (e.g. Inman, 2012).
Unfortunately, it appears that corrupt elites in countries with SAPs were able to sustain much of their power in the structurally adjusted situations (Van de Walle, 2001). First, it seems that many of those networks were more than the elites required for political survival, or survived despite reduced resource flows; elites could disinvest in clientelism or favors to defined groups without losing their political support. 6 Second, attacking obnoxious rent-seeking might not save much money but engenders conflict with rent-seekers – a finding that seems particularly unlikely to be confined to developing countries. As Rodrik concluded in a study of lessons from SAPs, ‘particularly to be avoided are liberalization measures likely to create a big bang in terms of income redistribution, but a whimper in terms of the efficiency with which resources are utilized’ (Rodrik, 1990: 939). 7 For Europeans confronted with headlines about the excesses of particular rent-seeking elites in peripheral Europe, these findings suggest that confronting the most egregious of such excesses is an efficient way to increase noncompliance and social conflict. Such rents can reflect political power. Third, not all rent-seeking is equally easy to change, which has further distributional effects. It is easier to find and weaken protective union and labor legislation than it is to understand the flows of capital in many banks, parastatals, and government contracts. Fourth, the process of structural adjustment created opportunities to expand assets or remove them from the country. Liberalization, especially grudging liberalization, involved sales of assets and writing of new regulations. These processes created opportunities for rent-seeking (Schamis, 2002: 5; Williams, 1994: 223). For those with the right knowledge and connections, state assets in the peripheral Eurozone countries might well be a bargain right now.
SAPs had unintended consequences
Case study literature helps to show why the SAPs did not necessarily produce the intended good effects. When authors delved into the effects of given reforms, they often found that the implementation, interpretation, and effects in context were quite different from that which was intended. SAPs had a particularly severe case of the implementation problems that afflict all policies to some extent (Bardach et al., 1977; Pressman and Wildavsky, 1980). That they had these effects is not surprising: it is hard to restructure, in detail, the policies of another country that is only making these commitments because of a desperate situation. The information asymmetry between the countries and the IFIs was usually enormous. The particular incentives for everybody involved could be skewed – from elites who wanted to do as little as possible, or focus on conserving their power, to different ministries using SAPs in bureaucratic politics, to low-level implementers who did rational things like respond to budget cuts by demanding ‘informal payments’, to well-connected businesspeople who took advantage of unfair conditions in the sale of state-owned enterprises, to IFIs themselves, which might have political reasons to make some countries look good, and make examples of others (Woods, 2006). The result was a long string of case studies of unintended effects (Campbell and Loxley, 1989; Collier and Gunning, 1999; Harvey, 1996; Mengisteab and Logan, 1995; Mensah, 2006; SAPRIN, 2004; Simon et al., 1995). Beyond economics, structural adjustment increased conflict. This had consequent bad effects on human rights as governments sought to retain control (Abouharb and Cingranelli, 2006).
Does the Eurozone experience conform so far?
The oldest EAP is Greece, which has so far been conforming to most of these predictions – including in the telltale fact that it is now on its second, and more prescriptive, EAP after its second, and larger, bailout in 2012. Since the Greek crisis began, the Greek EAPs have had the problems defined above. 8 There is clear evidence of noncompliance, perhaps most notably in the fact that civil service numbers that were supposed to be reduced in the first EAP only began to fall in 2013 (Granitsas and Bouras, 2012) and the Greek public administration and welfare state is still inefficient and frequently corrupt (Matsaganis, 2011). There is no evidence of overall economic growth, and the debt-to-GDP ratio has largely deteriorated. There is clear evidence that the effect has contributed to the immiseration of the Greek population, particularly through public sector wage cuts. Inequality is rising, as is unemployment and social exclusion (Matsaganis, 2012). The health effects of the cutbacks are already visible and highly negative, with health care utilization dropping and services to vulnerable populations being sharply cut back (Kentikelenis et al., 2011). Public health is already deteriorating, with corresponding increases in malaria, HIV, and mental health problems (Karanikolos et al., 2013; McKee et al., 2012).
Greek ‘governance’ is not obviously being improved by the EAPs either. While the democratic Greek political system has been unkind to the Socialists who initially revealed the problem and agreed the first EAP (narrowly electing New Democracy, which had been in office during some of the most recent excesses before the crisis, and also supporting anti-system parties), there seems to be some evidence that Greek elite networks are surviving well – whether in the specific noncompliance with demands that Greece lay off civil servants or in the apparent difficulties improving tax compliance and statistics (most notably, the arrest, on apparently political grounds, of the person brought in to improve the country’s statistics; see The Economist, 2011). In short, Greece has failed to see obvious benefits other than the (large amount of) money, Greece’s lenders are obviously not free of their concerns about Greek stability and repayment, and Greek politics has not noticeably changed for the better.
Ireland has apparently complied much better, and always had a deservedly better reputation for compliance among its EU peers (Falkner et al., 2007). It has been rewarded with less specific EAPs and more latitude for the government. Irish leaders successfully achieved a good deal of social consensus on austerity including the restoration of competitiveness through lower wages. This consensus has justified cutting the public sector workforce and social services (including health and social care in particular), with predictably inegalitarian effects, while the financial wealth of the richest has rebounded. It has not seen much growth since the EAPs, and its debt-to-GDP ratio has been deteriorating as the economy shrinks – approaching Greek levels of indebtedness after four years of austerity and pay cuts (Allen, 2012).
Portugal also has a good rate of compliance, according to its annual reviews – though the compliance they detail is mostly with headline budget figures rather than structural reforms. Compliance, of course, is hard. A preliminary analysis of the sustainability of increased health care user charges found that their pro-poor effects depended on exempting as much as 70% of the Portuguese population from them – which in turn made it unlikely that they will produce enough revenue, setting up a tension between social and fiscal objectives (Barros, 2012). This might be a case study of the unintended effects that this article suggests will arise; equally, will lifting rent control come with policies to increase the supply of low-cost housing, or will it simply price people out of city centers? The sustainability of that strategy – or of Portuguese finances in general – is questionable since, like the other two countries, it does not have any growth or much control over its debt-to-GDP ratio (a shrinking economy is rarely capable of paying down debt fast enough to keep that ratio from rising).
Conclusions
The analysis here drew on the substantial literature on SAPs, which also tried to enforce structural adjustment through conditionality. After much experience and much study, it turns out that their results varied from unsatisfying (mediocre compliance, unintended effects, and no predictable growth) to outright bad (lower growth, more SAPs, decreased equity, health and welfare, and diminution of democracy within the affected polities). The procedural legitimacy of the conditional loan as a policy instrument had always been weak, and its outcome legitimacy – the extent to which its works justified it – turned out to be weak as well (Scharpf, 2009).
The SAP analogy suggests that the likeliest outcome is the one underway: ongoing immiseration in the periphery, slower growth across the Eurozone, slow reduction in bank exposure to the peripheral states, degraded politics within the structurally adjusted states, frustrated lenders, and reduced legitimacy for the institutions and countries most prominently associated with the decisions. That is not a good agenda for a European Union built on democracy, ‘ever closer union’, and even a European Social Model; the shared unhappiness of borrowers and lenders is unlikely to be addressed if they continue to re-enact the history of structural adjustment. The IMF seems to recognize this, and has been markedly more dovish than the European Commission or prominent member states that support and help to finance the conditional loans. 9
In fact, the IMF’s evaluation of its own performance in recent Greek events concluded, inter alia, that excessive conditionality had been questionable (IMF, 2013: 2) – in keeping with recent (and not wholly successful) IMF efforts to draw back from detailed conditionality (IEO, 2007). In the Greek case, where the IMF has published extensive reviews of its own performance, the review was not positive:
Slippage in program implementation also reflected weak capacity. Officials recognized that they had underestimated the requirements of the program and overestimated Greece’s administrative capacity to undertake reforms. When laws were changed, there was insufficient follow up to ensure implementation and results were not analyzed, measured, and tracked. The weakness in administration and management necessitated multi-layered and repeated reforms and ever-more detailed conditionality, particularly with regard to improving tax administration since this was critical to the success of the program. The intensive TA involvement by the EC Task Force and the Fund was welcomed by officials and was not considered to be intrusive given the deep assistance that Greece needed. (IMF, 2013: 50)
Meanwhile, all three EAP states (and Cyprus, whose crisis is relatively recent) have failed to hit growth projections, and their debt-to-GDP ratios have stayed high or increased as their economies shrank (Ireland is growing very slowly since the end of 2012; the others are projected to grow in 2014; in all three, the latest data at the time of writing showed high debt-to-GDP ratios that were getting higher – notably an 8% increase for Ireland) (Eurostat, 2013). Another IMF working paper, attempting to recalculate the effects of public expenditure (cuts) in the case of Greece, found that the cuts were more damaging to the economy than expected, in part because ‘large data revisions following the start of the program, weaker than anticipated program implementation and payoffs from reform, political and social dislocation, and other factors’ meant Greek growth potential was underestimated (Bi et al., 2013: 25, italics mine).
If many commentators have pointed out the pitfalls of structural reform through conditionality, whether it is the academic literature here, the IMF’s own efforts to cut policy conditionality (Bird, 2009; IEO, 2007), or the World Bank’s abandonment of structural adjustment prescribing (Rodrik, 2006), then the question arises of why the Troika have persisted with both the substance in the EAPs and the process of the EAPs. One reason given by a Commission official (at a private seminar in Brussels, May 2013) and an ECB official (personal communication) was simple: what was the alternative? Given that unconditional grants or loans were not politically possible, the ECB refused inflationary policies, member states were disunited and strongly disinclined to extend guarantees to each other, and on any realistic scenario the peripheral economies would have fallen into deep trouble, adoption of Alesina’s theses and the IFI’s old tactics made sense. In principle, a much strengthened fiscal pact encoded in the Treaty on Coordination, Stability and Governance and associated legislation entrenching the Stability and Growth Pact will prevent future problems, and at some point the peripheral economies will grow and debt will fall. Once again, the projections are for a better debt burden in another year (as they have been each year since the EAPs began).
If structural adjustment lending’s rebirth in Europe seems preordained, given the options and positions taken by states and institutions since 2010, then the question about how to escape the current situation and prevent its recurrence or elsewhere in Europe seems to demand rethinking the questions and structure of such decisions. The sequence and contents of decisions can be examined to see what could go differently in the future, for example. The SAP experience does not just suggest that Europeans and students of European politics could and should learn about the limits of conditionality as a reform mechanism. It also suggests that the European Union, which is quite different from the broader international arena, might learn from debates about ways to ensure a fairer governance regime for the international political economy. It is, after all, not clear what the alternatives to conditional policy lending might be, which is how it comes to pass that a policy tool with such documented flaws is not just still applied by the IFIs in developing countries but is being used with such vigor and specificity. Application of reformist liberalism by means of conditionality is a topic well known outside Europe, and linking the two debates might hasten the European discussion towards different and more effective policy instruments for shared prosperity.
Footnotes
Acknowledgements
The author would like to thank: Ronald Labonté, Roberto Di Vogli, Holly Jarman, Erik Jones, Bart Vanhercke, Rita Baeten, and a GSP referee for their very helpful comments. Andrew Azorsky contributed research assistance and Barry Rabe at the Center for Local, State and Urban Policy generously provided a home for research and writing. This article was originally presented at a workshop of the European Social Observatory (OSE) and the European Union Studies Association in 2013.