An Analysis of the Structural Adjustment Programme in Colombia and Venuezla

According to Downes (1992), structural adjustment is the process of deliberately adjusting the

structure and organization of the economy to mitigate the effects of negative stocks or to take

advantage of new opportunities or challenges. It is in other terms, a macroeconomic

configuration that is generally geared towards facilitating economic development through the

achievements of economic growth, poverty alleviation, productive employment, social services

provision and environment protection. Established to be a direct source of liberalization and an

institutional attempt to accelerate spending in a social sector for the main purpose of addressing

large equity gaps that may be accumulated in a country overtime, this process that has been

dominant in the late 20th century, continues to be a source of much debate in developing

countries around the globe because of the dichotomy that lies in the literature. To be more

specific, while some proponents may see structural adjustment as beneficial due to it propensity

“to fuel productivity, realize viability in balance of payments, cause reduction in government

expenditure, improve economic competence, boost the growth potential and expand the

economic base of developing economies” (Sulanman, Migiro and Aluko 2014), other consider

it to be the demise of an economy, purporting that it intensifies fiscal strain, leads to further

unemployment, increased inequality by worsening the relative position of some groups in the

population, widens the debt gap of the economy and leads to increase dependency on richer

nations.

Hence the reason, why this research would be conducted, to analyse the overall construct of

the structural adjustment program in Colombia and Venuezla, with emphasis placed on various

areas that would answer the questions of 1) what the structural adjustment program is 2) how

it is beneficial 3) what are the factors that pinpoint the need for such 4) what are the attached
conditionality 5) how was it implemented and 6) what are the effects that the implementations

had on the economy.

 Factors that Led to the introduction of SAP in Colombia

Colombia, like many other Latin America countries, had been engulfed in a process of rapid

structural adjustment and reform that lasted from the period 1990 to 1993. This process that

was first initiated by the International Bank for Reconstruction and Development (IBRD) and

the International Development Association (IDA) whose mandate collectively includes

“providing assistance to member nations in their venture for development; supplementing

private foreign investment; and promoting long term balance growth in international trade”

Chand, 2008), not only saw the liberalization of external trade, the redefinition of the role of

the State, and significant growth in the public sector, but also allowed the country to overcome

many difficulties that stemmed from endogenous and exogenous factors which were for all

intents, considered influential in the implementation of the Structural Adjustment Program

herein. The IBRD in its report identified some of these influencing factors, pinpointing firstly

the Dutch Disease phenomenon which in conjunction with other resulting events, was deemed

integral in explaining what led to the downfall of the Colombian economy in the late 20th

century. However, the questions that may come to mind is, what exactly is the Dutch Disease

and how did it adversely affect the economy of Colombia?

Based on the definition proposed by Puyana (2000), the Dutch Disease represents a conceptual

model in which drastic increases in foreign exchange earnings and wage increases in the

affected export sector may cause exchange rate, wage, relative price and terms of trade

distortions that decrease the competitiveness of other sectors and induce policy responses that

are oftentimes difficult to reverse once the boom has subsided. In Colombia, it epitomizes the

confounding upsurge in investments that has seen its way into the oil and mining sector in the
1970’s, one that led to the decline of coffee prices and consequently placed a stumbling block

in the Colombia’s agricultural sector in the later years. This decline was attributed mainly to

the fact that when Colombia’s oil prices increased the revenues generated was used to purchase

and develop public infrastructure which subsequently spiralled a decrease in the profitability

of its previously dominant mainstay- agricultural production. Agriculture production was

neglected for the most part as a result of this occurrence, and the rising wages and appreciated

currency that served as a monetary policy to maintain financial stability, squeezed the

profitability of non-oil exports and undermined their competitive position internationally,

while cheap food imports competed with domestic food production. In such a case, Colombia

shifted their focus from the production of non-oil traded goods to that of non-traded goods

(mostly public services) and the production of oil, thereby increasing their vulnerability to

external stuns such as the sudden decline in international oil prices that took place in the 1980’s,

and caused them to feel the blunt impact of the debt crisis that followed.

The debt crisis

 Implementations that came as a result of SAP in Colombia

While overcoming the challenges that were brought on by the Dutch Disease phenomenon

continues to be a daunting task, it is important to note that success in accordance with the

acceleration of the growth path was achieved in the long run, particularly through broader and

more intensified structural reformations. These reformations, unlike those that were embarked

on in the earlier ages, depended to a great extent on bringing public finances on a viable

equilibrium; placing public debt on a sustainable path; and strengthening financial sector

regulations and supervision with a specific end goal to address the aforementioned issues that

threatened the economic wellbeing of the Colombian economy.

According to Schipke, Cebotari & Thacker (2013), equalizing public finance to offset surging

fiscal deficit required regional coordination of fiscal policies as neither revenue mobilization

nor expenditure rationalization alone was sufficient. Stabilizing public debt required

noteworthy fiscal adjustments, debt restructuring, debt-equity swaps and improvements in tax

and customs administration to prevent spill-overs from the weakest member, which

undermined confidence in the country’s currency. Reinforcing financial area controls and

supervision required a solidification of the division to permit enhanced oversight, strengthen

the framework, to guarantee the suitability of the monetary union, to maintain the peg, and to

certify that the budgetary framework continues to support the development of the economies.

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