Structural adjustment did not always succeed in the 1980s. But neither did some alternative strategies. Bank economists look at Peru's experience
The often negative social consequences of structural adjustment in the short run have been widely noted and criticized. But far less attention has gone to the consequences of avoiding stabilization and adjustment efforts.
That's why Peru's experience, as chronicled by World Bank economists Paul Glewwe and Gillette Hall, deserves study.[1]
During the 1980s Peru chose not to adopt a program of structural adjustment--the Bank and IMF prescription for renewing economic growth in developing nations.
Structural adjustment demanded austerity: it called for deep cuts in government spending to cut budget deficits. It also meant removing price controls and freeing market forces to promote efficiency.
In the long run, such a program promised to reduce poverty by restoring fiscal stability that was to underwrite vigorous economic recovery. It soon became clear, however, that the long run might be decades, not just a year or two, and Keynes once noted: "In the long run, we are all dead."
The Bank's World Development Report 1990 dealt with concerns that strict structural adjustment might leave behind a whole generation of poor. The report recognized that progressive relief from poverty should also be part of the adjustment process.
In the early 1980s, Peru tried stabilization programs with little success. Its efforts could not overcome the effects of both world recession and the debt crisis. Economic conditions deteriorated, inflation soared, and real output fell. The APRA (Alianza Popular Revolutionaria Americana) government that took office in 1985 inherited an anemic economy. It decided to postpone further efforts at stabilization and jump-start the economy with an injection of government spending.
The government also introduced price controls and broad-based income transfers and subsidies. The focus of the APRA program was to protect the poor while encouraging demand-induced growth. But it had exactly the opposite effect, according to Glewwe and Hall.
Peru's economy did expand rapidly at first. But the unsustainability of these so-called "heterodox" policies was evident by mid-1987, when inflationary pressures and widening budget deficits appeared. Reactivation policies nonetheless continued until September 1988, when the government announced "El Paquetazo," a severe readjustment of prices that increased consumer prices by 114%. Ad hoc adjustment, consisting primarily of price increases without real wage increases, characterized the last two years of the APRA administration. By the time a new government came to power in 1990, inflation was running close to 3,000% a year. Production and wages were falling (see figure 1).
Several studies of Peru's experience show why the country went in economic freefall. By 1988, the government was bankrupt, and it began to pay its expenses by printing more money. For a while, Peru was virtually blacklisted by public and private international lenders. Exports and national reserves declined, while average income plummeted.
But until Glewwe and Hall looked at the data, no study had conclusively examined how the overall economic decline in Peru had affected different segments of the country's population.
Glewwe and Hall based their inquiry on the results of Living Standards Surveys in Lima in 1985-86 and 1990 (see box). The surveys reveal an average decline in consumption of over 50% from 1985 to 1990, one of the most rapid and severe deteriorations in living standards ever recorded (see figure 2). And the poor suffered the most, with the poorest decile of the population experiencing a 62% decline in consumption.
The Peru Living Standards Survey's data on consumption showed that the poorest families had the largest drop in consumption, the somewhat better-off less decline, and so on. In short, inequality increased.
Housing for the poor, made of less durable materials, deteriorated more than middle-class and upper-class housing during the late 1980s. Access to public services, such as water and sewage systems, also deteriorated most among the poorest.
Two other significant points emerged from the surveys: Households headed by individuals with little education experienced greater declines in consumption than the better educated.
And households headed by unemployed individuals suffered more than those headed by employed individuals. Poor families were more likely to have lower levels of education, and higher unemployment.
In sum, the APRA government adopted a policy it thought would encourage rapid economic growth and more equitable distribution of income. But by avoiding fiscal stabilization, it threw the country into deeper crisis and made it more difficult for the poor to live better lives.
The orthodox policies that were rejected in Peru in 1985 were adopted in 1990 after a change of government. Peru now faces the task of reviving economic growth with much higher poverty rates than those prevailing in 1985.
Glewwe and Hall conclude that some structural adjustment is necessary, but that governments can cushion the impact of such reforms by directing social expenditures for education and public services towards the poorest sector of the population. No quick fix solutions exist for dealing with economic stagnation and poverty.
The poor suffered most
LSMS data 