Unorthodox Adjustment and in

PAUL GLEWWE AND GILLETTE HALL

The social consequences of and kets were virtually unobtainable by the end IMF-supported structural adjustment pro- of 1982. From 1982 to 1985, Peru's net capital Teed with economic stag- grams have been widely discussed and criti- inflow (public and private) fell by 78 percent, nation and decline dur- cized in recent years. But whether countries with net private capital flows negative in adopting alternative policies have been suc- 1984 and 1985. The lower demand for Peru's ing the 1980s, many de- cessful in protecting the poor while reviving exports, owing to the world recession, pro- F has not been subject to the duced a 50 percent decline in their unit value \ veloping countries same scrutiny. The case of Peru, where Bank between 1980 and 1985; despite an increased adopted macroeconomic and and IMF-supported structural adjustment volume, total export revenue declined by 24 structural adjustment programs policies were deliberately avoided from 1985 percent over that period. to 1990, offers an opportunity to undertake The World Bank and IMF approach to ad- that were recommended and just such an examination. Two unusually rich justment in countries experiencing such dete- partially financed by the World household-level surveys for Peru provide riorating economic conditions has emphasized Bank and the IMF. A few coun- unique insights into changes in living stan- immediate stabilization—getting trade and dards under an "unorthodox" program. The budget deficits under control—followed by a tries that were anxious to avoid findings are quite sobering; not only did the restructuring of the economy to promote sus- the perceived economic and so- economy as a whole deteriorate but the poli- tainable, long-run growth. Such growth is to cies also failed to protect the poor. be achieved by removing price and other mar- cial costs of structural adjust- ket distortions (such as trade barriers), and by Unorthodox approach, 1985-90 ment, however, experimented encouraging private sector investment. The APPvA (Alianza Popular Revolu- In the early to mid-1980s, the short-run im- with alternative "unorthodox" cionaria Americana) government that took of- pact of adjustment policies on poverty was of- (the so-called heterodox) pro- fice in 1985 inherited an economy that had not ten not explicitly addressed by the Bank/IMF weathered the debt crisis well. Despite two sta- approach. The implicit presumption was that grams. While designed to en- bilization programs between 1981 and 1985, growth would reduce poverty in the long run, courage rapid growth, along inflation had soared, with prices more than and that short-run negative consequences with a more equitable distribu- doubling each year after 1982. At the same were an unavoidable cost of adjustment. Only time, real output declined by 27 percent and in the late 1980s was poverty recognized as a tion of welfare, such alternative gross domestic investment fell by 62 percent. central issue of the adjustment process; incor- approaches did not always suc- These depressed conditions reflected both porating poverty concerns into adjustment international and domestic factors. Certainly policies then became the topic of the World ceed and, in fact, may have hurt the bankers' panic ignited by the 1982 Development Report 1990. the poor more than the general Mexican default had a negative impact; al- In contrast to Bank/IMF policies, Peru's though Peru had been meeting debt payments unorthodox approach taken in 1985 did not population. on schedule (and even early) through 1983, focus on immediate stabilization. Rather, poli- loans from international private capital mar- cies were aimed at "jump-starting" consump-

10 Finance & Development / December 1992

©International Monetary Fund. Not for Redistribution Table 1 Table 2 A profile of Peru's macroeconomic deterioration The poorest suffered the biggest drop in consumption 1980 1985 1990 Index of annual: Decile1 Lima 1985-86 Lima 1990 Percent change GDP per capita 100 87 70 Average real minimum wage, Lima 100 54 21 1 2,258.6 848.9 -82,4 Consumer prices1 100 3,474 40,216,592 2 3,181.1 1,345.2 -57.7 2 3 3,808.8 1,731,9 -54.5 Exports (dollars) 100 76 83 Net international reservesa 100 89 -13 4 4,386.9 2,015.2 -54.1 5 5,164.7 2,349.7 -54,5 Source: Gtewwe and Hall, 1992. 'June of each year, through June 1,1990. 6 6,098.9 2,739,6 -55.1 Estimated from data through September 1990. 7 7,128.5 3,218.5 =-54.9 3June of each year. 8 8,669.9 3,970,8 -54.2 9 11,451.5 5,311.0 -53.6 10 25,657.8 11,796.0 -54.0 tion and investment through large injections the brink of bankruptcy by 1988. of government resources into the economy. At that point, the government fi- All Lima 7,774.4 3,531.7 -54.6 Macroeconomic stabilization, it was thought, nanced expenditures by effec- Source: Gtewwe and Hall, 1992, Note: Figures are valued in thousands of constant June 1, 1990 could only be attained after an initial period of tively printing money, and infla- Intis ($1 = 50,000 Mis) for Tables 2 and 3. growth. The government introduced price tion soared. However, none of 'Ranked from poorest to richest. controls, along with broad-based subsidies these studies conclusively exam- and transfers, with the explicit aim of protect- ined changes in inequality and ing the poor while encouraging demand-in- poverty during that period. The measure of household welfare used duced growth. Further measures included a here is the value of consumption of goods and unilateral reduction in foreign debt payments, Living standards services. Very careful procedures were used to which would finance the process of "economic Four Living Standards Surveys (see box) convert nominal amounts reported in the reactivation," redirecting funds toward do- have been conducted in Peru. This article com- questionnaires to real monthly values, yield- mestic expenditures, with priority given to pares data from the 1985-86 survey, which ing real household consumption per month. meeting the needs of the poor through wage covered all of Peru, with the 1990 survey that These values are then adjusted for the number increases, jobs programs, and investments in was conducted in metropolitan Lima only and ages of individuals in each household to education and health. (covering 33 percent of the country's popula- provide an adjusted per capita consumption While these policies fostered rapid eco- tion). Our discussion of the survey results is, figure that reflects the variation in consump- nomic growth in the short run, their unsus- therefore, limited to Lima, the capital. tion levels of adults and children. tainability was evident by mid-1987, when in- The overall results of the two surveys re- flationary pressures and widening budget veal an average decline in .consumption of deficits appeared. Reactivation policies none- Table 3 over 50 percent from 1985 to 1990 (see Table theless continued until September 1988, when Identifying the poorest families 2), which is without doubt one of the most the government announced "El Paquetazo," a in Lima rapid and severe deteriorations in living stan- severe readjustment of prices that increased Percent change dards ever recorded. consumer prices by 114 percent. Ad hoc ad- in per capita Changes in overall distribution of justment, consisting primarily of price in- monthly consumption consumption expenditures. To examine creases without real wage increases, charac- since 1985-86 changes in inequality from 1985-86 to 1990, Sex terized the last two years of the APRA Male -54.5 both surveys divided the population of Lima administration. Annual inflation rates Female -54,9 into ten expenditure groups. As shown in (December-December), compared with a base Education level Table 2, decile 1 contained the poorest 10 per- of 158 percent in 1985, rose 1,720 percent in None -58.7 cent of the population (defined by adjusted per 1988, 2,776 percent in 1989, and were still ac- Primary -S9.1 capita consumption expenditures), decile 2 con- celerating when the government changed in Secondary general -55.1 tained the next poorest 10 percent, and so on. late July 1990. From 1987 to 1990, per capita Secondary technical -46.4 Several conclusions can be drawn from University -54.0 production declined by 25 percent, and the Other post-secondary -38.9 Table 2. First, all deciles experienced declines real minimum wage by 60 percent. Occupation of head in their consumption that left them at about Recent appraisals of the Peruvian experi- Agriculture -50.4 one half of their 1985-86 levels. Second, the ence highlight the severe deterioration be- Sales/services -56.7 poorest decile lost the most, experiencing a 62 tween 1985 and 1990 in virtually all indicators Industry/crafts -52.3 percent decline in consumption, and the sec- of macroeconomic performance (see Table 1). White collar -54.1 ond poorest decile experienced the next Briefly, the country was virtually blacklisted Unemployed -65.9 largest decline, a drop of 58 percent. Thus the Retired -50.2 by both public and private international All Lima -34.6 data from these two surveys indicate that the lenders, and thus had no access to foreign distribution of consumption expenditures in credit. Domestically, the use of government Source: Glewwe and Hall, 1992. Lima became less equal between 1985-90, de- Note: Population percentages do not add to 100 due funds (generated in part through the diversion to missing information for 0.3 percent of observaBons in spite policy goals to the contrary. of debt payments) to subsidize consumption 1985-88. Changes in consumption expendi- and investment brought the government to tures by household characteristics. One

Finance & Development / December 1992 11

©International Monetary Fund. Not for Redistribution Table 4 ditions, based on hous- that poverty indexes that take into account The extent of poverty in Lima ing conditions and the the depth of poverty (the "gap" between the provision of social ser- poverty line and each household's actual ex- Percent of population below vices, is also a good indi- penditures), as well as distributionally sensi- - , • pevertx,sB

Source: Glewwe and Hall, 1992. dence of housing made cost of this basket in June 1, 1990 Intis was 1 Based on monthly real adjusted food and total expenditures. of improvised materials 154,416, which implies a cost of 4,632,480 Intis (straw, cane, and mud per month. Adjusting the resulting per capita shacks) qua- drupled be- value of the food basket for household compo- way to examine the change in consumption tween 1985-86 and 1990. Access to public ser- sition implies a poverty line of 1,477,650 Intis expenditures from 1985-86 to 1990 is to look vices, such as public water and sewage sys- per "adult equivalent." If one defines as poor at gender, education level, and employment tems, also deteriorated most significantly any household for whom per capita adjusted characteristics of household heads. Table 3 among the poorest. This decline was particu- consumption is less than this figure, so that highlights three results. larly evident in the impoverished areas of even if all household income money were (1) The position of female-headed house- Lima—Conos Norte, Este, and Sur—whose spent on food it could not purchase the mini- holds relative to male-headed households in residents also suffered the greatest declines in mum basket (Poverty Line 1), only 0.5 percent Lima changed very little from 1985-86 to consumption. of the population of Lima was poor in 1990. 1985-86. But if one defines as poor all house- (2) In Lima, households headed by someone Measuring the change in poverty holds where per capita food expenditures with no education or only primary education Our findings also show significant changes were below this amount (Poverty Line 2), 12.7 experienced the largest declines in expendi- in poverty in Lima from 1985-86 to 1990, al- percent of Lima's population was poor; in tures relative to those with better educated though quantifying such changes is some- 1985-86. heads. The percentage declines in expendi- what difficult. We use the standard "head- The percent of the population with expendi- tures of these two groups were larger than for count" definition of aggregate poverty, that is, ture levels below the amount required to pur- any other population group classified by the fraction of the total population whose con- chase the basket according to Poverty Line 1 household head characteristic (with the sole sumption is below the given poverty line. jumped from 0.5 percent in 1985-86 to 17.3 exception of the unemployed). Only house- There is no official or widely accepted poverty percent in 1990—an unprecedented increase. holds headed by those with secondary techni- line in Lima. But it is clear, as will be seen be- Alternatively, according to Poverty Line 2, the cal or other post secondary education exhibit low, that poverty in Lima increased substan- incidence of poverty quadruples between declines in consumption significantly smaller tially between 1985-86 and 1990. This implies 1985-86 and 1990; in 1985-86, one out of ev- than the average for all of Lima. This suggests ery eight residents of Lima were poor; by 1990 that technical education helps reduce vulnera- more than half were poor. bility to severe welfare loss. The fact that those with higher education and technical Paul Glewwe Some lessons training also began the period with relatively a US citizen, is an The Peruvian Government opted for a pol- higher consumption is consistent with the find- in the World icy of "unorthodox" adjustment during ing in Table 2 that the distribution of expendi- Bank's Population and 1985-86 to 1990 in an attempt to encourage Human Resources tures became less equal from 1985-86 to 1990. Department. He has de- rapid growth and improve living standards. (3) Persons living in households where the grees from the University While it is very difficult, and beyond the head was unemployed experienced by far the of Chicago and Stanford scope of this article, to prove that the increase largest drop in consumption, and expanded University. in poverty was caused by the specific macroe- from 2.9 percent to 5.1 percent of the popula- conomic policies adopted between 1985-90, tion. Further, absolute consumption levels for the findings do provide a stark example of the these households in 1990 were lower than for difficulty of using unorthodox policies to si- all employment categories. This contrasts Gillette Hall multaneously encourage growth and reduce a US citizen, is a sharply with the economic status of the unem- Consultant with the Bank's poverty. Our research shows that the hoped ployed in Lima in 1985-86, when households Poverty Analysis and for improvement in growth rates and living headed by the unemployed had higher con- Poverty Division of the standards did not materialize. In fact, the inci- sumption levels than all other occupational Population and Human dence of poverty in Lima increased dramati- categories except white collar employees. Resources Department. She cally and the distribution of consumption be- Thus, unemployment rose substantially be- is a PhD candidate at came more unequal. tween 1985-86 and 1990, and the bulk of the Cambridge University, Further investigation provides a clearer pic- newly unemployed were among the poorest. England. ture of what happened between 1985-90. Other indicators of living standards. • Households headed by individuals with Examining changes in the physical living con- relatively low levels of education experienced

12 Finance & Development / December 1992

©International Monetary Fund. Not for Redistribution greater declines in consumption level than the would significantly improve living standards. better educated. Thus the poor, who have Perhaps the most important lesson to be The Living Standards Measurement Study (LSMS) lower education levels, suffered dispropor- drawn from these conclusions is that there are began in 1979. Its purpose is to generate high qual- tionately because the returns to human capital no quick fix macroeconomic solutions when ity, policy-relevant household survey data in develop- were more stable at higher levels of education. addressing the twin problems of economic ing countries. While the data can be used for a vari- In terms of identifying the poorest, the level of stagnation and poverty in developing coun- ety of sectoral and economic analyses, the LSMS education is probably the best indicator. This tries. "Unorthodox" alternatives to structural mandate centers on welfare, income distribution, suggests that long-run social investment adjustment, while designed to encourage and poverty. In particular, survey results are useful in assessing the impact of development policies and plans would do well to give priority to educa- rapid growth along with a more equitable dis- programs on different socioeconomic groups. In ad- tion of the poor. tribution of welfare, may not succeed in this dition to Peru, surveys have been completed in • Unemployment rose significantly and be- endeavor and may, in fact, hurt the poor more Bolivia, Cote d'lvoire, , Jamaica, Mauritania, came a distinct characteristic of the poor. than the general population. The orthodox Morocco, Pakistan, and Venezuela. New LSMS pro- Thus social expenditure programs designed to policies that were rejected in Peru in 1985 jects are underway in China, Guyana, Nicaragua, increase low-wage employment opportunities were adopted in 1990 after a change of gov- and Viet Nam. may be an efficient method to target the poor. ernment. Peru now faces the task of reviving • The provision of public services, particu- economic growth with much higher poverty For an in-depth analysis, see "Poverty and larly potable water and sewage services, dete- rates that those prevailing in 1985. Inequality during Unorthodox Adjustment: The riorated across the city, but most severely in Case of Peru, 1985-90" by the authors, Living the three poorest regions—Conos Este, Norte, Standards Measurement Study Working Paper No. and Sur. Investment in public water and sani- 86, The WorldBank, 1992, available from the tation services directed at these three areas World Bank Publication Services.

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