Sincronía Winter 2000

The International Monetary Fund:
Main Characteristics, Conditionality and Macroeconomic Adjustment

Giovanni E. Reyes
University of Pittsburgh
Graduate School of Public and International Affairs

Contents

1. Introduction

2. IMF: Main characteristics

2.1. Origins

2.2. Groups

2.3. Objectives

2.4. Amendments

2.5. Capital and quotas

2.6. Organization

3. Conditionality and macroeconomic adjustment

4. Major foundations of economic adjustment

5. Bibliography

1. Introduction

The International Monetary Fund -IMF-, has played a central role in the operation of the international monetary system. In several cases, this institution has acted as a useful forum for consultation and cooperation in international monetary relations, but in other respects is a provider of financial resources for monetary problems especially in the developing world. According to its principles, one of the main roles of the Fund is to finance transitory payments problems, and, second, to promote adjustment to permanent imbalances through conditionality programs.

This conditionality has made the Fund’s influence very controversial. According to several analysts from the Third World, the Fund’s policies have not ensured that country member’s adjustment are consistent with the requirements of international economic stability. Also it is argued that the Fund has not been supplementing the stock of international reserves, and its task of smoothing the process of payments adjustment by monitoring and lending in support of adjustment efforts has been hampered by its limited resources and inflexible mode of operation. This is only part of the controversial role. Another polemic result is the contraction of the effective demand in the majority of people in counties which have implemented the Fund’s conditionality programs.

The role that the IMF plays within the international economic system is not only very important -particularly for the Third World nations- but also can be crucial during specific periods. For example, from the summer of 1992 to the fall of 1993 -a time at which a critical stage was endured for the United Kingdom and Italy within the European Monetary System and other leading economies- the IMF lent a total of 15.3 billion dollars. By that time and in terms of debt with the fund, Europe went from 12 percent (1992) to 21 percent (1993), Russia alone accounting for 6 percent of the total. More recently during the international financial crisis of 1997-1998, the fund gave not less than 180 billion dollars to mitigate the critical economic conditions in Indonesia, Malaysia, South Korea, Japan, Russia and Brazil.

The first part of this document will present the main organizational and functional features of the IMF, the second part will indicate the main characteristics of conditionality and the macroeconomic adjustment programs. The third and final part will present the economic concepts and the general theoretical foundations of the economic adjustment initiatives especially for developing countries.

2. IMF: Main Characteristics

2.1. Origins

The International Monetary Fund was established by the Bretton Woods conference, and it is still administering the international monetary system, operating as a central bank for central banks in different countries. Member nations subscribe by lending their currencies to the IMF; the IMF then relends these funds to help countries in balance of payment difficulties. In recent years, the IMF has played a key role in organizing a cooperative response to the international debt crisis and in helping the former socialist countries make the transition to market economies.

During the final stage of the Second World War, and after the publication of a French and a Canadian plan, and through consultation with several countries (including the Soviet Union), Britain and the United States arrived at an agreement that was published on April 21 1944. It was discussed with other countries in June 1944 in Atlantic City, New Jersey, and finally submitted to the UN Monetary and Financial Conference, which met at Bretton Woods, New Hampshire, from July 1 to 22, 1944 and decided to set up two institutions, the International Monetary Fund and the International Bank for Reconstruction and Development: the World Bank.

The Fund and the Bank both officially came into existence on December 27, 1945, after a sufficient number of countries together representing a certain part of the capital (80 per cent for the Fund, and 65 for the Bank) had approved the Articles of Agreement of the two agencies. The World Bank opened for business on June 25, 1946; but the Fund only started financial operations in March 1947. In the subsequent years many plans have been drafted for the reform of the international monetary system. The best known of these is the Triffin Plan. To a certain extent, this plan wishes to return to the Keynes Plan by converting the IMF into an international central bank. Edward Bernstein, a former IMF official, has also put forward numerous proposals, several of which moreover, have been implemented.

2.2. Groups

Groups of nations have had special role in the direction of the international monetary system and in the Fund's activities. The Group of Ten ( the United States, Canada, the United Kingdom, Germany, France, Italy, Belgium, the Netherlands, Japan and Sweden; Sweden was an observer) was established in 1962 when some countries were prepared to grant aid to the United Kingdom. Afterwards these countries regularly held talks on the international monetary situation. Important decision are often made by the Group of Ten, G10 (e.g. the Smithsonian Agreement of December 15, 1971).

Since 1975 there are annual summits of heads of state or government. Participants are the members of the Group of Five, G5 (France, Germany, Japan, the United Kingdom and the United States), and Italy, since the second summit also Canada (often referred to at G7). G5, G7 and G10 may meet at a ministerial level. The United States, Japan and Germany constitute the Group of Three, which generally discusses international monetary problems.

2.3. Objectives

The Fund's objectives were defined in six points (Article 1), the first two of which (promotion of international monetary cooperation and expansion of international trade) are rather in the nature of general directives. The Fund's real task consists mainly in the objective laid down in point 6, namely, to shorten the duration and to reduce the degree of disequilibrium in members' balances of payments. In direct relation to this, the general objectives are:

a) To temporarily give confidence to member states by placing the general resources of the Fund, subject to adequate safeguards, at their disposal; in this way, they are afforded the opportunity of eliminating disequilibria without taking measures that are harmful to national or international prosperity (point 5);

b) To promote exchange stability, and maintain orderly exchange arrangements and to avoid competitive exchange depreciation (point 3) .

Originally, the desire was to avoid a return to repeated devaluation and deprecations by means of which the leading countries had tried in the 1930s to outdo each other in the field of trade, but the Fund did not succeed in attaining this objective. Point 4 also prescribes cooperation in the establishment of a multilateral payments system with respect to current transactions and in the removal of exchange restrictions that hamper the growth of world trade.

The major purposes of the International Monetary Fund are:

1. To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary programs.

2. To facilitate the expansion and balanced growth of international trade, and to contribute, thereby, to promote and maintain high levels of employment and real income and to develop productive resources of all members; these are the primary objectives of its economy policy.

3. To assist in the establishment of a multilateral system of payments with respect to current transactions between members and to eliminate foreign exchange restrictions which hamper the growth of world trade.

2.4. Amendments

At the 1974 annual meeting, a Joint Ministerial Committee of the Board of Governors of the World Bank and the Fund on the Transfer of Real Resources to Developing Countries (Development Committee) was established. This Committee advises the Board of Governors of the World Bank and the Fund on the transfer of resources to less-developed countries. It pays special attention to the problems of the least developed countries and of the less developed countries most seriously affected by the balance-of-payments difficulties.

A second amendment came into force on April 18, 1978, introducing fundamental changes in the Articles of Agreement: they relate to the exchange arrangements, the reduced role of gold in the Fund and the purpose of making the special drawing rights -SDR- the most important reserve asset.

In 1968, the IMF was authorized by its member nations to create a new international currency called Special Drawing Rights or SDR. Each country joins the IMF by contributing a sum called the quota of subscription. It consists of gold, the country's domestic currency, and a special IMF-created asset called special drawing rights of SDRs. The IMF lends these funds to countries that need its financial assistance. Countries can use their special drawing rights to purchase specific currencies needed for foreign exchange market intervention. The IMF can create additional SDRs as needed to provide adequate international liquidity. This "paper gold," as it was referred to, became a supplement to the international reserves held by IMF. Each member was given SDRs in relation to its total subscription of reserves. SDRs have not replaced the dollar or gold but have become an addition to the stock of international money.

In May 1990, the Interim Committee agreed that it was necessary to strengthen and enhance the instruments available to the Fund to prevent and deter overdue obligations, which had become a real problem in the 1980s. After that, the Board of Governors adopted a resolution (effective June 28, 1990) approving a proposal for a Third Amendment of the Fund's Articles. It would add new provisions suspending (by a 70 percent majority of the Executive Board's total voting power) voting and certain related rights of those members who persist in their failure to fulfill any of the obligations under the Articles, after having been declared ineligible to use the general resources of the Fund. The Third Amendment is not yet effective.

2.5. Capital and Quotas

The quota -or share in the capital- of the original members was laid down in the Articles of Agreement. In subscribing to these quotas, each original member country had to pay a quantity of gold that was equivalent to the smaller of the following amounts: 25 per cent of this quota; 10 per cent of its net official holdings in gold or dollars at the time when the Fund notified the members of the commencement of this operation. The difference between the quota and the sum paid in gold was met in the country's own currency. The quota for the countries that acceded subsequently and the proportion of the quota that had to be paid in gold was fixed at the time of their admission.

At intervals of not more than five years, the Board of Governors can, as a result of a general review, propose a general change in the quotas. A member's quota may also be adjusted at any time, at the request of the country concerned.

On December 11, 1978 the Board of Governors agreed to increase all quotas by 50 per cent, with special increases for some less developed countries. On March 31, 1983 the Board of Governors adopted a resolution authorizing an increase of 47.5 per cent in quotas, with larger increases for eleven members, mostly oil-exporting and less-developed countries.

The new quotas for individual members were arrived at by distributing 40 percent of the overall increase in proportion to existing quotas and 60 percent selectively to reflect changes in member’s relative positions in the world economy. On June 28, 1990 the Board of Governors adopted a resolution for an increase in the total of Fund quotas by 50 per cent. This increase of 45,082.15 million SDR will bring the size of the Fund to 135,214.7 million SDR. It was decided that 60 percent of the overall increase would be distributed to all members in proportion to their present individual quotas so as to maintain the balance between different groups of countries. The remainder would be distributed according to the members' new relative economic positions.

Since the Second Amendment 25 percent of the increase of the increase in the quotas is not longer payable in gold but in SDR. The quotas also are expressed in SDR. The Board of Governors may decide, by a 70 per cent majority of total voting power, on the same basis for all members, that this payment can be made in whole or in part, in the currencies of other member-countries, with their approval, or in the member's own currency. Payments may be made in gold instead of SDR or currency at a price agreed on the basis of the market price, provided the Fund allows this by an 85 per cent majority of the total power.

The organization of the IMF based on the quota structure, has made it a target of criticism by the developing countries. The size of each country's IMF quota -and therefore of this routine borrowing privilege- is related to the country's economic size. Voting within the fund also is determined by the size of a country's quota. As a result, the United States has approximately 20 percent of the voting power within the IMF and the developing countries relatively little, even as a group. Data about this characteristic is provided by Table 1.

In contrast, other international organizations that allocate votes on a one-country, one-vote basis, such as the United Nations General Assembly, give the developing countries -LDCs- a much larger voice. The fact that LDCs do most of the borrowing from the IMF, in which the developed countries have most of the voting power, has led to accusations that the Fund is a club of rich countries that ignore the interests of the poorer developing countries.

Table 1

Quotas and Votes of the Twenty Principal IMF Countries

-1998-

Source: International Monetary Fund, Annual Report 1999, 176-179.

2.6. Organization

In a general sense, the IMF consists of member countries that promise to abide by the Articles of Agreement defining the rules, privileges, and obligations of membership. Thirty of the forty-five countries represented at the Bretton Woods talks accepted membership before December 30, 1945. The former Soviet Union refused to sign the Articles of Agreement. Poland, Czechoslovakia and Cuba withdrew from the Fund on March 14, 1950; December 31, 1954 and April 2, 1964 respectively, but Poland again became a member (1986) as well as Czechoslovakia (1990).

As a result of the admission to membership of many Asian and African territories that have become independent, the number of member countries has greatly increased: from 58 in 1956, to 155 in 1991, to 169 in 1992. The most recent members are those countries from Eastern Europe and the former Soviet Union.

Membership of the Fund gives the right to participation in the Special Drawing Rights (SDR) Department. Any country can withdraw from the Fund by giving notice to Fund headquarters. If a member country does not meet its commitments, it may be denied the right to draw on the Fund's resources; if, after a reasonable period has elapsed, it remains in default, it will be requested to withdraw from the Fund. For example, Czechoslovakia was obliged to resign in this way, in 1954.

The IMF has a Board of Governors as the top Executive Branch. Each country appoints a governor and an alternate who serve until a new appointment is made. The Board examines the operation of the Fund. The Board may also be convened at the request of at least fifteen governors, or by a number of governors who together represent one-quarter of the total votes, at the request of the Executive Board or by the Council. It approves the annual report and the accounts, elects its Chairman -from among the governors-, and every two years the Executive Directors other than the appointed executive directors.

By an eighty-five per cent majority the Board of Governors may establish the IMF's Council in the form of a permanent organ of the Fund with decision-making authority, in order to continue the activity of the Interim Committee. The Council, if established, will be charged with the general functions of supervision and adaptation of the international monetary system, including the continuing operation of the adjustment process and developments in global liquidity; and in this connection, review of developments in the transfer or real resources to less-developed countries.

Within the limits of the powers conferred by the Board of Governors, the Executive Board is responsible for conducting the business of the Fund. There are now twenty-two directors, six of whom are appointed and sixteen elected. Each of the six countries with the largest quotas -the United States, the United Kingdom, Germany, France, Japan, and Saudi Arabia-, appoints one director: the others are elected by the remaining countries. In order to ensure a desirable balance in the composition of the Executive Board the number of elected directors may be changed.

Elections are held every two years. Each governor votes for only one candidate. In the elections of the directors, both geographical and political factors play an important role. The countries of Latin America elect three directors; those of the Nordic Countries -Denmark, Finland, Iceland, Norway and Sweden-, jointly elect one director as do the groups of countries of English-speaking and French-speaking Africa and those of South-East Asia.

The Executive Board appoints the Managing Director, who will not be a governor or director and who is responsible for the day-to-day management of the Fund. The Managing Director is chairman of the Executive Board but is not entitled to vote, except in case of a tie. M. Camdessus -France- is the present Managing Director of the IMF since 1987. The headquarters of the Fund are in Washington D.C. in the territory of the country with the largest quota.

3. Conditionality and Macroeconomic Adjustment

The greatest source of controversy between the developed and developing nations within the IMF is over the issue of conditionality. Conditionality refers to the Fund's requirement that countries follow certain policy prescriptions as a condition for borrowing. A general example of the IMF’s methodology to operate would be the following: suppose that Poland's program to introduce a market economy is in trouble because of rapid inflation. It is having trouble paying interest and principal on its foreign loans. The IMF might send a team of specialists to pour over the country’s books. The IMF team would come up with an austerity plan for Poland, generally involving reducing the budget deficit and tightening credit. These measures would slow gross national product -GNP- growth and reduce the trade deficit. When Poland and the IMF agree on the plan, the IMF would lend money to Poland, perhaps US$ 1 billion, to "bridge" the country over until its balance of payments improves. In addition, there would probably be a "debt rescheduling", wherein banks lend more funds and stretch out existing loans. If the IMF program was successful, Poland’s balance of payments would soon regain health, and the country would resume economic growth.

The IMF's prescriptions -adjust the exchange rate to make it more consistent with the balance of payments, lower deficit spending by the public sector, and lower monetary growth rates-, have a short-term impact on a contractionary macroeconomics condition, which basically means an increase in unemployment. Nevertheless, developed countries and the Fund itself have argued that conditionality is essential to preserving the Fund's continuing role as a lender of last resort to countries experiencing balance-of-payments difficulties. With no conditionality, countries could continue to borrow while avoiding the admittedly difficult policies required for adjustment.

Related to conditionality is external debt management. It is one facet of macroeconomic policy and, in particular, balance of payments policy. External borrowing can bridge the gap between domestic savings and investment and between exports and imports of goods and services. By allowing higher expenditures over a given period of time than would otherwise be possible, external borrowing may assist development by supplementing export revenues and foreign direct investment or it may smooth the impact of temporary shocks that reduce consumption, and thus improve economic welfare by allowing for higher domestic incomes. Factors on which the IMF bases policies include those which determine sustainability in the balance of payments. The main aspects related to these factors are:

a) External borrowing that is used for productive investment, with returns that at least match the cost of borrowing, taking into account the capacity of the borrower. ;

b) Aggregate domestic saving that at some point exceed aggregate domestic investment by a margin sufficiently large to meet at least the interest charges on previously incurred debt;

c) A growth in national output that exceeds population growth.

d) An ability to obtain the external resources needed to service the debt.

The economic adjustment is based on the following basic macroeconomic

models:

1. Fundamental identity of aggregate demand:

2. Sources of disposable income:

3. Uses of disposable income:

4. Budget deficit:

Where:

Y = GNP, gross national product YD = disposable income

C = consumption TR = transfers

I = investment TA = taxes

G = government purchases S = savings

NX = net exports BD = government budget deficit

Countries undertaking adjustment programs usually suffer from a broad range of economic problems. These may include: a) external imbalances that are reflected in current account deficits, capital flight, and high levels of external indebtedness; b) accelerating inflation often accompanied by falling private investment and stagnant or even negative, growth; and c) growing reliance on rationing and controls -for credit, imports, prices, etc.- with consequent reductions in capacity utilization and increases in structural maladjustments and underlying imbalances.

In that context, Fund-supported adjustment programs seek to restore economic growth while bringing about a balance of payments position that is sustainable in the medium term. Achievement of these objectives requires coordinated use of a variety of policy measures. These include: a) Demand management policies, particularly monetary and fiscal measures, usually restrictions in both policies; b) Exchange rate policies, often by floating exchange rates and devaluations; c) External debt management policies, negotiations and conditionality from the IMF; and d) Structural policies affecting capacity utilization and productive potential, encouraging the private sector and reducing capacities in the public sphere.

Table 2

IMF : General Macroeconomic Adjustment

Sources: IMF Macroeconomic Adjustment, 1998, Kreinin, M; International Economics, 1997, Dalgaard, B. Money, Financial Institutions and Economic Activity, 1998.

4. Major foundations of economic adjustment in developing countries

Conditions to carry out the economic adjustment programs existed in many middle income countries by the end of the seventies. In 1979 many small nations had difficulty surviving the second oil price increase after the first one, in October 1973. By the end of the 1970s, there were fewer financial resources in the international bank system to continue the lending cycle which had spiraled many developing nations into large national debts as in 1974.

At the beginning of the 1970s, as a result of the increase in prices engineered by the Organization of Oil Export Countries in October 1973, those nations who lacked the capacity to produce oil had sufficient international financial resources to avoid the pain of economic adjustment. At this time, private international banks were maintaining significant levels of liquidity and were willing to lend to developing nations. These resources generated the problem of external debt and, in immediate terms, they solved the problem of lack of money for many underdeveloped nations.

At the end of the seventies, the international scenario was characterized by the fact that international financial resources were not readily available, the more developed nations were facing recession in their economic systems, and the international prices of commodities -which are the most important exports from many developing nations- were falling in international markets.

In summary, the general situation of middle income countries worldwide at the beginning of the eighties was characterized by: a) dealing with the recession of the more developed nations; b) facing a lack of financial resources in the private international bank system for continued loan opportunities; and c) grappling with the need for monetary funds to compensate for the second oil price increase and the already contracted external debt duties.

These factors forced many nations to negotiate with international institutions for financial assistance, especially with the International Bank for Development and Reconstruction, the World Bank -WB- and the International Monetary Found -IMF-. These international organizations formulated several terms for lending money to nations. These terms were known as "conditionality", and they established the main framework for macroeconomic decisions to be implemented at a national level. This conditionality was a prerequisite to be carried out in order for a nation to become eligible to borrow financial resources and as a means of guarantee for the payment of previously contracted debt.

In general terms and based on the theoretical foundations of macroeconomics, the main characteristics of borrowing nations were:

a) A significant deficit in the balance of payments, mainly because of instabilities which occurred in the trade balance -more imports with less exports. One of the main factors affecting this situation was the low price of exports due to the economic recession in the more developed nations. In addition, the higher interest rates in the United States automatically increased debt duties. It is important to consider here, as a complementary but not less significant fact, that many middle income countries need to import equipment and several means of production from the more developed nations;

b) High levels of unemployment derived not only from structural economic limitations within each nation, but also from the fact that investments from the private and public sectors were at lower levels than in previous years;

c) High levels of inflation which in turn did not allow for stability in the implementation of productive processes from private and public sectors. It also did not breed confidence in international transactions, but created an environment of uncertainty. In addition, many nations were facing decreasing levels of international monetary reserves;

d) Significant levels of governmental fiscal deficit, which was one of the main factors in causing a rise in inflationary rates in the domestic market. Because governments were receiving lower amounts of taxes, they printed domestic currency and created the internal debt problem, which increased the amount of money at the local level and therefore increased the level of inflation.

This general picture and the interaction of its elements can be analyzed according to a macroeconomic perspective. From this point of view it is possible to say that the higher the level of production of a particular country, the higher is the tendency to increase its imports. When economic growth is low, imports have a tendency to also be low. With a low level of economic growth, a positive situation can be seen in the balance of trade, because exports usually are higher than imports; however, in the case of a stagnant economy, higher levels of unemployment are unavoidable. The opposite situation is evident when there are higher levels of economic growth. In this case, there are lower levels of unemployment, but usually this condition has negative results in the balance of trade since a stronger economy tends to yield more imports than exports.

When a country has the two "extreme" conditions of either high level economic growth, or low level economic production, there are clear choices in terms of macroeconomic prescriptions. When the levels of national production are low, there are positive results in the balance of trade and negative effects on the employment variable. In this case it is necessary to implement expansionary fiscal and monetary policies which will decrease, at least temporarily, the level of taxation, and provide more money to the national system. All that is being done in this case is to "push" the economy. As a result of these actions it is expected that the balance of trade will decrease, but levels of employment will increase.

When the economy of a country is experiencing high levels of economic growth, it has negative numbers in the balance of trade and favorable numbers in terms of unemployment. In this case, it is important to implement fiscal and monetary contractionary policies, such as increasing taxes, and reducing the amount of money available in the national economic system. Another measure consists of increasing the interest rate, which makes lending more difficult and reduces the total output of the national economy. As a result, there will be better figures from the balance of trade, even when we expect to have relatively more unemployment. The contractionary fiscal and monetary policies aim to avoid an "overheating" of the economy.

In both "extreme" conditions there is no controversy concerning the macroeconomic dispositions. However, problems arise in a case where there is an economic system such as those of the small economies of developing countries, which can be characterized in the following manner:

a) Small economies in which market mechanisms are not working "normally" according to macroeconomic models of more developed nations;

b) High levels of inflation mainly due to the printing of new money by the government;

c) High levels of unemployment combined with a negative situation in the balance of trade.

With these characteristics, many underdeveloped nations faced an environment of stagflation, that is to say inflation with economic recession and thus unemployment. In addition they had negative numbers in the balance of trade. Here lies the controversy. If expansionary fiscal and monetary policies are applied, the economy is being "pushed," and thus the problem of unemployment is solved to some extent, yet the balance of trade deteriorates. If the contractionary fiscal and monetary policies are applied, the balance of trade problem is solved, but there will be an increase in unemployment.

In order to solve this problem, it is important to realize the significant limitations of traditional fiscal and monetary approaches. The solution provided through the terms of conditionality of international organizations mainly consisted of the following aspects:

a) To promote exports as a means to improve both the balance of trade and the current levels of employment, avoiding the unilateral approach of the application of traditional fiscal and monetary policies alone;

b) To reduce governmental fiscal deficits. Indeed, at the beginning of the eighties, the IMF established a governmental deficit limit of 3 percent of the gross national product in a particular country;

c) To generate revenues for the government based on indirect taxes, that is to say taxes on consumption rather than taxes on income and property. By implementing this measure an even larger reduction in imports was expected;

d) To depreciate and devaluate national currencies to stimulate investment and to improve conditions in international reserves.

All of these terms were factors in generating positive results in terms of controlling inflation, obtaining better results from the trade balance, and increasing employment in some sectors of economic activity. The main problem could be identified in an increase in the number of people living below the poverty level and within conditions of social marginality, due largely to the following principal causes. First, an increase in taxes was supported by social sectors which depended on wages and salaries, because they did not have significant levels of property in fixed factors of production. In addition to this circumstance it is necessary to keep in mind that, even before the adjustment process, a significant part of society was already living under high levels of unemployment.

Second, concerning the trade liberalization processes, the contraction in import levels tended to elevate the prices of basic goods mainly because imports are not only constituted by luxury products, but also of technological products that were indispensable in many cases in national production spheres. In many underdeveloped nations, their industrial capacity of production is usually aimed at producing terminal goods, instead of intermediate products, such as fertilizers, machinery, and equipment parts.

Third, in developing nations conditions of high competitiveness and open market economies do not exist as in more developed nations. This made it possible for functional monopolies to act within the conditions of the domestic market of a particular nation. Therefore, the distortion in prices of several goods was affected by the speculation of a few suppliers of a particular product. This situation is a distortion of the free price movement due basically to supply and demand mechanisms. Again, the result was an even larger contraction in the levels of effective internal demand, and thus another factor which increased poverty levels.

Broader conditions of marginality are defined as the fact that poor sectors are living in the margin of regular economic mechanisms in the domestic market, because they have needs but they do not have the economic capacity to acquire the products to satisfy them. This condition of marginality can be compensated for by the mechanisms of the marginal or informal economy in the urban centers, or by the activities of peasant economy in rural areas, by which families in the countryside can take advantage of family work and can produce for self-sustainment in terms of basic food production.

With a basis in the aforementioned elements, the basic foundations for explaining the implementation of economic and social adjustment programs in developing countries are apparent. These measures attempted to solve problems in the national accounts, but they actually increased the conditions of poverty in these nations. These programs of economic adjustment can be studied as "pragmatic" dispositions, and they can be interpreted in a more concrete sense using the theories of world-systems and globalization. This analysis is possible because these programs were a response to national conditions which were in turn greatly influenced by the international economic state.

Factors from the foreign arena in applying economic adjustment measures included inflationary pressures from the devaluation of currencies, the higher costs of oil, the significant degree of high external vulnerability, especially in small economies, and the low level of value-added for the main exports of agricultural products, which in turn are largely affected by the fact that they are not essential products and they depend on weather conditions for production. These elements lead to the consideration that to have higher degrees of success concerning the results of the economic adjustment processes it is important to change the structure of exports for many developing countries.

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Williamson, John; and Gavin, Michael. International Monetary Issues, in International Monetary and Financial Issues for the Developing Countries. (New York: United Nations, 1998).

Yarbrough, Beth; & Yarbrough, Robert. The World Economy: Trade and Finance. (Chicago: Dryen Press, 2nd. edition, 1995).

Pittsburgh, January 2000

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