During the 1980s many LDCs, particularly in SubSaharan Africa, have entered into programmes of `adjustment' supported by IMF and World Bank loans. At a lunchtime meeting on 8 February, Ravi Kanbur analysed the distributional effects of these programmes and proposed some changes in the conditions attached to these packages by international institutions. Ravi Kanbur is Professor of Economics at Warwick University and a Research Fellow in CEPR's International Trade programme. The talk at which he spoke was the fourth in the series on `Trade Policy and the New International Economics', and was financed by a grant from the German Marshall Fund of the United States.

The need for adjustment packages arose, Kanbur noted, from the growth of unsustainable gaps between aggregate supply and aggregate demand in many LDCs. These gaps were caused by: too rapid expansion of aggregate demand, particularly public expenditure; adverse movements in terms of trade, mainly due to movements in key commodity prices; reductions in income because of domestic policies that discouraged production for international markets and reduced economic efficiency; and reduced capital inflows. Adjustment programmes typically feature measures to tackle these problems. The initial, stabilization phase of adjustment, lasting two to three years, focuses on immediate reductions in aggregate demand. There is little that can be done to counter shifts in international terms of trade or reduced growth rates in developed countries, which determine the demand for exports. But there is much that can be done to increase output and improve its composition: such measures include lower exchange rates, fewer foreign exchange and import controls, financial liberalization and privatization of public services. They are seen as part of a longer-term strategy of `structural adjustment', and are justified by the argument that a `liberalized', more `market-oriented' economy is more likely to promote allocative efficiency and maximize aggregate output.

Even if this argument is accepted, Kanbur noted that any programmes whose express purpose was to alter the structure of the economy were bound to have large distributional and social effects. For example, policies to devalue exchange rates will make production of export crops more profitable and reduce the rewards to producers of goods and services for the domestic market. Although the hope is that this will lead to movement of workers to more remunerative occupations, economic analysis suggests that the factors used most intensively in production for export will reap permanently higher rewards from the adjustment. Many programmes involve a retrenchment in public sector employment and reductions in protection of private sector enterprises: even if these changes do not affect the poorest workers, they may alienate articulate and powerful groups in society who can block the implementation of adjustment.
Kanbur had studied the Economic Recovery Programme (ERP) begun in Ghana in 1983. Since the mid-1970s, the Ghanaian economy had deteriorated rapidly: by 1980 export volume was around half of the 1970 level, and per capita incomes in 1984 were 30% below their 1974 level. The changes resulted from a fall in the price of exported cocoa, the expulsion of around 1 million Ghanaians from Nigeria in 1983-5, and a severely overvalued exchange rate. The first phase of the ERP, from 1983 to 1986, was a classic stabilization package. During the second phase of the programme, from 1987 to 1989, structural adjustment is being intensified. Among the proposals are a restructuring of public expenditure, an increase in domestic cocoa prices, and continued liberalization of the exchange rate and trade regimes.
The Ghanaian government has recognized that certain groups, particularly poor urban workers who would pay increased prices for imported food and workers in previously protected enterprises, were bound to lose unless compensating actions were taken. Redeployment programmes and compensation packages had been introduced: these were targeted not only at the poor but also at those whose opposition could impede the adjustment process. This contrasted starkly, Kanbur noted, with the lack of such measures under the earlier adjustment programme in neighbouring Ivory Coast, which had been accompanied by severe reductions in the welfare of government workers and those who had produced goods and services for home consumption.
Whether or not Ghana's ERP will have the desired effects is yet to be seen. Kanbur argued that the explicit recognition of the social and distributional dimension of adjustment was not only ethically desirable, but would also increase its likelihood of success. International agencies such as the World Bank have now begun to take account of these effects in designing adjustment programmes. This was welcomed by Kanbur, who argued that the international donor community should give serious attention to the additional resources and information on target groups that were required in order to implement such compensatory packages.