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Failed expectations of SAPs, liberalization

By Chakravarthi Raghavan

Geneva (23 Jan): The experience to date of structural adjustment programmes (SAPs) in low income countries has not borne out the expectations and have failed to unleash forces of growth, according to the UN Conference on Trade and Development.

"The African experience suggests that too rapid an exposure to import competition may have deterred some domestic enterprises from making the kind of restructuring investments that take time to yield results," says the Secretary-General's report to UNCTAD-IX.

In a chapter devoted to promoting enterprise development and competitiveness, the report notes that over the past decade nearly all developing countries and transition economies have enacted an array of institutional and economic reforms to liberalize the environment for enterprise activity and these efforts were beginning to bear fruit, but not without a degree of restructuring and dislocation.

While the liberalization of domestic markets was encouraging greater private sector activity, with some impressive double-digit annual growth in private sector in several Asian and Latin American countries, the greater freedom for entrepreneurial activity has also given rise in some instances to extortionate pricing, gangsterism and lawlessness.

While the sustained growth of exports of developing countries has been due to private enterprises, domestic and foreign, liberalization of trade has also meant many enterprises have had to close down. Newly privatized or incorporated enterprises have been stimulated to rationalize their production methods, but have also shed workers and the pool of unemployed has consequently grown in many countries.

In many countries, market reforms have been implemented in the context of SAPs. While their stabilization objectives have met with some success, the persistence of low-growth conditions have discouraged capital outlays on modernization of equipment, capacity expansion and exploration of new business opportunities. the cutback in public expenditures in many developing countries have prevented investment in basic physical, institutional and standard scientific and technological infrastructures required by local and foreign-owned enterprises to be able to operate profitably.

The supplier response has been particularly weak in Africa. A major inhibiting factor has been scarcity of enterprises in general, and their low initial levels of capabilities in particular. Even if otherwise efficient producers, enterprises lack know-how to tap emerging market opportunities and the problem is aggravated when infrastructure and institutional support is limited, as is the case in many LDCs.

In transition economies, market implementation has been slowed by necessity to overhaul institutions with considerable historical, economic and social-political dominance.

Public enterprises have generally faced more difficulty in adapting to market reforms, partly because governments have laid greater stress on improving financial performance rather than on efficiency. Reduction of size of the public sector has received greater attention than need to improvement management. Success in cutting relative size of the public sector in developing countries has been limited.

Overall, the report says, enterprises in developing countries and transition economies will need to continue to restructure and improve competitiveness if they are to meet successfully the challenge of competing imports or to penetrate foreign markets.

While FDI and other types of foreign collaboration can help improve competitiveness, particularly in manufacturing sector, and while almost all developing countries and transition economies can point to a few such projects, many countries are disappointed in the interest shown so far by the foreign enterprises. Despite liberalization by countries of the framework for foreign investment, foreign investors have not been enticed because of high transaction costs and inherent risks of investment in collaboration with weak and inexperienced local partners.

Referring to the East Asian experience, the report notes that there could be no across-the-board extrapolation, there were several features of that experience that could be used, and it is possible to influence the market place to set priorities and map out strategies to serve the long-term interests of the enterprise sector and the economy as a whole.

The report identifies the creation of an enabling environment for entrepreneurship and enterprise activity as one of the most important roles of public policy intervention, including government measures and international financial support of such measures. Also essential are institutional, legal and commercial frameworks defining the market conditions for transacting business.

An important aspect is the quality of the working relationship between government and the private sector. All governments regulate the private sector in one way or another. How this is done often matters more than why. Quite often, well-intentioned policies to correct market failures have the opposite effect, while interventionist policies can be market friendly when formulated in a transparent and non-discriminatory manner.

The report outlines several ideas for formulating national strategies for enterprise development, for mobilizing entrepreneurial resources, for supporting micro-enterprises in the informal sector, assisting small and medium-enterprises (SMEs) and providing them with access to support services, finance, information networks, building technological capabilities at enterprise level and encouraging inter-firm linkages.

In terms of global supporting activities, the report notes that there is no shortage of policy approaches and technical cooperation programmes for enterprise development. At the macro-level, the World Bank, IFC and other institutions provide advice, usually focusing on policy and institutional reforms and removal of obstacles to conducting business.

At the micro-level, the focus is on providing supporting and training to enterprises of all kinds.

"Not all these elements are in place in all countries, and when global support is forthcoming, it is not always country-specific," UNCTAD says and suggests enterprise development missions, especially in LDCs, to formulate country-specific strategies and implementing technical cooperation programmes.

Referring to some of the UNCTAD programmes that have been in operation, the report advocates relevant international institutions coming together to formulate a more systematic approach to multiple needs of low-income countries in a number of areas.

SAPs, the report says, should include strong measures in favour of such enterprise development.

SAPs were initially introduced in low-income countries, the report comments, in response to severe external shocks and in order to correct policy distortions that were deemed to impede the development process.

They were designed as a finite process of policy reform, supported by external financial assistance. The overall expectation was that macro-economic stability would unleash the forces of growth.

"Experience to date has not borne out these expectations," the report says. "While the precise pathology varies considerably among countries, it would appear that, owing to structural features and the embryonic stage of the development of markets, managers and entrepreneurs, as well as lack of reasonable period for adjustment by enterprises, the expected response of producers to liberalization and deregulation has often failed to materialize.

"Indeed, the African experience suggests that too rapid exposure to import competition may have deterred some firms from making the kind of restructuring investments that take time to yield results."

Failure of liberalization to bring forth adequate responses by producers, difficulties in reforming public sector revenue systems and lack of sufficient external support has meant that budget deficits have had to be dealt with primarily through expenditure cut-backs.

A major new effort needs to be set in motion to strengthen structural adjustment by addressing, in consultation with the private sector, the need to include strong supply-side developmental measures for enterprise development. These measures should enhance the supply response to other adjustment measures and promote employment. Adequate attention should be given to the link between producer services and adjustment in manufacturing and agricultural sectors.-SUNS

The above article was originally published in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.


 


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