COMMISSION OF THE EUROPEAN COMMUNITIES 
C0M(94) 447 final 
Brussels, 27.10.1994 
COMMUNICATION FROM THE COMMISSION 
Community support for structural adjustment in the ACP countries: towards the 
consolidation and strengthening of a realistic and concerted approach. 
CONTENTS 
INTRODUCTION 
I. THE CONTEXT OF COMMUNITY ACTION 
1. An international climate still working against the ACP 
2. A particularly unstable social and political background 
3. Disappearance of traditional economic development growth centres 
4. Strong international competition for available financial resources 
5. Yet economic adjustment had become inevitable for most ACP countries 
II. SOME FIGURES 
1. Community contribution 
2. Distribution of resources 
3. Use of instruments 
4. Implementing conditions 
TIL FIRST QUALITATIVE RESULTS 
1. In-house 
2. At Community level 
3. At international level 
4. In the recipient countries and regions 
IV. EFFECTS OF ADJUSTMENT: CONCLUSIONS FOR AND AGAINST 
1. Adjustment unavoidable, but with ambiguous results 
2. Some critical comments 
V. THE WAY FORWARD 
1. .Consolidation 
2. Deepening 
3. Broadening 
CONCLUSION 
COMMUNITY SUPPORT FOR STRUCTURAL ADJUSTMENT IN THE ACP 
COUNTRIES: TOWARDS THE CONSOLIDATION AND STRENGTHENING OF A 
REALISTIC AND CONCERTED APPROACH. 
INTRODUCTION 
The Community is a major technical and financial partner of the ACP countries and it 
was natural, therefore, that those implementing economic adjustment programmes should 
have approached the Community for assistance. 
There were various specific reasons for this. The countries were facing unprecedented 
economic and financial difficulties, which required the commitment of appropriate 
financial resources; or else they were still not reaping the benefits, in the form of desired 
economic growth rates, from the reforms that they were implementing at high social cost; 
or, further, they were experiencing difficulties in their negotiations with those unavoidable 
financial partners in the sphere of adjustment, the Bretton Woods institutions. All these 
factors explain the ACPs' wish to involve the Community, both in the assessment of their 
programmes and in the financial support which it could bring to them. 
The Community met these expectations and by the end of negotiations with the ACP 
countries support for structural adjustment was formally provided for in the fourth Lomé 
Convention. 
This decision constituted a major political act. It was the first time that, in such a 
sensitive, perhaps even controversial, matter, specific provisions laying down objectives, 
guidelines and implementation methods for adjustment support had been freely negotiated 
between the developing countries and their external partners. 
The first interim report setting out guidelines and practical arrangements for involving the 
Community in structural adjustment in the ACP countries resulted in a Council resolution 
adopted in May 1992. In it the Council reaffirmed the need for the Community to help 
restore the major macroeconomic balances in the countries concerned, against the 
background of the wider aim of creating conditions for the resumption of growth and an 
improvement in the welfare of the people. 
The joint reports presented by the ACP-EEC Development Finance Cooperation 
Committee to the ACP-EEC Council of Ministers in March 1992 and April 1993, and the 
ACP-EEC Council resolutions resulting from them, endorsed the measures adopted since 
the signing of the Convention and the main guidelines for future action in implementing 
structural adjustment support. 
There can of course be only one reform programme in any given country/Advancing 
beyond the specifically financial aspect of making funding available for adjustment 
support, and rather than leaving it to the Bretton Woods institutions to determine the 
reform programme and then insert the Community support component, the Commission 
followed the prompting of the Convention and opted for a more ambitious approach 
consisting in providing an input into the design of the programme itself. 
The intention was not to open up parallel lines of action but rather to ensure that 
Community concerns as expressed in the text of the Convention were taken fully into 
account when reform programmes were drawn up. 
With its role as a major player in the economic adjustment process acknowledged, the 
Commission concentrated on developing its expertise by focusing its efforts on the factors 
regarded as essential in the light of the Convention, namely: finding a balance between 
adjustment and long-term development, adjusting the pace of reform to each country's 
specific capacities and constraints (including social and political resources and 
constraints), making allowance for the regional dimension and safeguarding the social 
sectors, this last being the key to the sustainability of the process by combining growth 
objectives with considerations of equity. 
In order to establish its credibility the Commission acted quickly to formulate a short-
term core of priority actions: 
(i) first, by ensuring stricter coherence between all Community instruments (Stabex, 
food aid, etc) in order to comprise not only a "critical mass" in the financial sense 
but also to provide a significant package of effective economic and sectoral 
reforms; 
(ii) in addition, by taking an increasingly active interest in public finance in the 
countries concerned, in order-to help them improve their budget procedures in 
terms of transparency, integrity, efficiency and equity, and to identify means of 
checking compliance by the ACP States with their budget undertakings, thereby 
providing security for the financial assistance provided by the Community; 
(iii) lastly, by strengthening coordination with other donors - including the Member 
States, the IMF and the World Bank - both at the programme design stage and at 
the operational level, in order to exert a moderating influence on the process by 
arguing wherever possible for a strict but also realistic approach to adjustment, 
differentiated where appropriate, and above all humane. 
At the same time the Community implemented a series of support programmes to help 
some thirty ACP countries meet their financing requirements in 1991-92 and again in 
1993-94. 
Meanwhile, major international discussions were taking place on structural adjustment and 
its effects and implementation, the question of renewing the IMF's Enhanced Structural 
Adjustment Facility (ESAF) and the prospects for the third phase of the SPA1 to cover 
Special Programme of Assistance for Africa. 
4 
the years 1994-96. These discussions were based, in general, on the initial conclusions 
of the studies carried out by those variously involved in the adjustment process. 
The Community has also embarked upon important negotiations for the renewal of the 
Financial Protocol under the fourth Lomé Convention, in which structural adjustment will 
retain a significant place. 
Now is therefore a particularly good time to take stock of the quantitative and qualitative 
aspects of the Community's involvement in support for economic reform, to summarise 
current thinking and to spell out all the lessons to be drawn from the first round of 
Community involvement, in terms both of resources mobilized and the general approach 
adopted. 
The gravity of the situation of the ACP States in general - and of Africa in 
particular - together with the reservations forming part of the conclusions to be drawn 
from a decade of adjustment in the region call for concerted action by the donor 
community, in which the European Union has a major role to play. 
I. THE CONTEXT OF COMMUNITY ACTION 
1. An international climate still working against the ACP 
External factors have continued to be unfavourable and have helped produce particularly 
difficult economic conditions for the countries under adjustment, thus dampening the 
positive effects expected from supply side reforms and aggravating the adverse impact 
of financial reform policies. 
The deterioration in the terms of trade and the downward trend of prices for the main 
commodities (coffee, cocoa, phosphates, oilseeds, etc.) to levels lower than at any time 
since the Second World War, together with price and exchange rate instability, had a 
proportionately greater impact on countries with economies largely dependent on 
commodities, notably agricultural commodities. 
Commodity agreements, negotiations on which have become seriously bogged down, 
failed to provide a means of offsetting certain adverse effects of market trends. 
The high interest rates of recent times and the dwindling or even disappearance of 
external private capital flows have in many cases worsened external balances, already 
affected in most of the countries concerned by structural trade deficits. The combined 
effect of the overall unfavourable world trade situation, from the standpoint of the ACP 
countries, stemming from pressure exerted by newcomers on world markets (countries in 
south and south-east Asia, for example) in a climate of fierce trade riyalry between 
Europe, the United States and Japan, and also the absence of the ACP countries from the 
major international negotiations, resulted in a continual shrinking of markets, in the face 
of which the measures adopted by the countries concerned (not always convincingly, it 
is true) with regard to productivity, competitiveness or exchange rates were of no avail. 
On top of this external debt has continued to increase during the adjustment period, with 
a steep increase in the portion of the debt that cannot be rescheduled, despite the fact that 
in recent years appreciable progress has been made in the treatment of debt. The burden 
of this debt and the need for adjustment measures geared to dealing with it have become 
an unavoidable aspect of adjustment programmes. 
2. A particularly unstable social and political background 
War and serious political disturbances have continued in some countries - especially in 
Africa - bringing instability even as they search for new and more democratic systems. 
Political instability and the uncertainties dogging the initial moves towards democracy 
have in many instances upset the delicate balance between the social and political 
background and the economic policies from which the people, after decades of 
quiescence, are now entitled to expect positive results in terms of living standards and 
social progress 
At the same time those newly responsible for government are themselves having to come 
to terms with democracy, with its train of agreements to be reached and social and 
political balances to be struck, and realizing that while the favourable "effects of their 
economic policies may be slow in coming, their adverse consequences accrue 
immediately. 
3. Disappearance of traditional economic development growth centres 
The countries which in the past provided (or might have provided) the driving force for 
development in their region, pulling their neighbours' economies along with them to some 
extent, have lost a great deal of their influence, either because of the particularly serious 
nature of the economic and financial situation they themselves are facing, or because they 
are having to deal with social and political disturbances degenerating substantially into 
virtual civil war, or else because, failing to find the necessary degree of consensus, they 
end by drifting inevitably towards a compounding of both kinds of crisis. 
The situation in Africa is particularly striking from this point of view since the former 
economic heavyweights are today in the most serious difficulties. It is to be hoped that 
the recent devaluation of the CFA franc will enable some of these countries to shake off 
the crisis and thereby return to the path of growth. 
4. Strong international competition for available financial resources 
Although the international community has endeavoured on many occasions to reassure 
the developing countries, a number of developments in recent months indicate that they 
are tending to receive relatively less attention, at least in terms of financial resources that 
are available or can be made available. 
The renewal of the ESAF, the IMF's most concessional instrument for supporting 
structural adjustment policies - and one targeted on the poorest countries - has run into 
problems stemming from lack of financial resources following the withdrawal of some 
bilateral donors. 
The last SPA meeting revealed a difficulty - not previously encountered in that forum - in 
finding all the funds required for phase 3, which was planned to meet the financing needs 
of the countries concerned for the years 1994-96. So far, less than 70% of requirements 
is covered and there is a danger that adjustment in the countries concerned will be 
underfinanced - and hence ineffective - unless corrective measures are taken. Failing a 
significant additional financial effort on the part of donors, the source of such measures 
can lie only in more radical treatment of the countries' external debt. 
In this connection it is vital to understand that in spite of all the undertakings given there 
is still no long-term solution to the debt problem, since the amount owed has increased 
steadily and the overall effect of successive reschedulings has merely been to shift the 
heaviest part of the burden into the future. 
5. Yet economic adjustment had become inevitable for most ACP countries 
Adjustment aims to restore various kinds of economic balance where these have been 
upset and to adapt economies to the facts of a changed international economic situation. 
It became an unavoidable necessity for the countries concerned because 6t" their critical 
economic, financial and, consequently, social difficulties and the tottering structure of 
their economies. 
Some developing countries were able to postpone this adjustment process through massive 
borrowing, but it is now clear that they could put it off no longer; as a logical 
consequence, the adjustment issue now dominates relations between developing countries 
and their external partners and has become the required basis of dialogue between them 
and the donors. 
In these circumstances, a growing proportion of the funds channelled to developing 
countries is allocated by reference to adjustment programmes, and no debt processing 
operation can be carried out unless the debtor country has first concluded an agreement 
with the International Monetary Fund. This fact demonstrates to what extent adjustment 
has become an absolute necessity for the vast majority of ACP countries. 
n. SOME FIGURES 
1. Community contribution 
Between the entry into force of Lomé IV and the end of September 1994, the 
Commission adopted 54 financing decisions allocating to 36 countries eligible for 
structural adjustment support a total of ECU 1 098 million, made up of ECU 856 million 
in special structural adjustment resources and ECU 242 million from national indicative 
programme resources. 
By the end of 1994, the total will have risen to an estimated ECU 1 180 million, 
including ECU 920 million in special structural adjustment resources (out of a grand total 
of ECU 1 150 million provided for under the Convention). 
In 1990 and 1991, the first allocation was assigned to 41 potentially eligible countries, 
of which 35 were notified of their first allocation, in line with Article 281 of the 
Convention] 
By the end of 1992 only 21 of these countries had managed, with the financial support 
of the Community, to put their structural adjustment programmes into effect. 
This means that half of the potentially eligible countries have been unable to exploit that 
eligibility, and that funds available to active countries have been frozen. There are several 
reasons for this. The most important of these have been the linkage between the 
automatic eligibility established in the Convention and the position of the Bretton Woods 
institutions in their reviews of programme performance (including their reaction to 
programmes going wrong), but also the relatively frequent infringements of democratic 
processes and human rights (a key element of the Convention) during the first few years 
of implementation. 
2. Distribution of resources 
In response to this situation, a new method of distributing resources was used for the 
second allocation, based on a more direct link between eligibility, allocation of funds and 
implementation, and on annual disbursement targets for active countries, revised at the 
end of each financial year. 
These new procedures made it possible to give more support to countries successfully 
pursuing their reform programmes with the help of the main donors, and to achieve 
higher disbursement rates. 
At the end of September 1994, from both allocations, of the ECU 1 098 million approved 
in financing decisions some ECU 725 million (66%) had been disbursed, of which ECU 
600 million from specific structural adjustment resources. 
3. Use of instruments 
Community support has most frequently taken the form of general import-programmes, 
this being the instrument that is best suited to the requirements of across-the-board 
economic liberalization, and to the needs of convertible currency economies such as those 
of the franc zone, given that the current regulations preclude giving direct budgetary 
assistance to the countries concerned. 
This aid, which is made available to the central banks of the countries concerned, has 
provided economic operators with the currency they require to pay for their imports. 
The programmes have generated counterpart funds that have been gradually integrated 
into a macroeconomic. approach linked with financial and monetary balances in the 
countries concerned, as opposed to past practice, which assigned them only a 
micro-economic role. 
The funds have been used as part of a single, coordinated budget policy to cover public 
operating and capital expenditure, thus enabling the Community to act as the Convention 
directs in support of essential social services and the maintenance of economic and social 
infrastructure. 
Nearly 70% of the counterpart funds generated by the financing decisions have been 
allocated to the social sector, with basic health care and primary education the main 
beneficiaries, and nearly 10% has gone to the maintenance of infrastructure, particularly 
roads. Employment has received around 4% of the total, while financial restructuring in 
the agriculture and parastatal sectors has accounted for the balance. 
In addition to allocating resources to national budgets, the Commission has also promoted 
structural changes in the budgets to target spending on the priority health and education 
sectors, and to reflect real needs in terms of infrastructure maintenance. This has entailed 
an ever-closer involvement in public expenditure reviews, often in collaboration with the 
World Bank. 
4. Implementing conditions 
There has been no major problem in monitoring compliance with the conditions imposed 
with regard to the implementation of Community measures. The organization of these 
conditions into a three-level hierarchy has enabled a balance to be struck between the 
problem of subjectivity that can affect the assessment of a general programme and the 
importance attached to special, suspensive, often sector-specific, conditions, which 
together comprise the basic factors determining the effectiveness of Community support. 
The first-level conditions are'of a general nature, and allow the Community to remain 
independent in its assessment of the general framework of the adjustment process in 
question. It is often at this level that the detail, and the sheer number, of the conditions 
specified in the "contracts" concluded with the Bretton Woods institutions can generate 
one-off delays and ultimately create a "stop and go" policy situation. 
The Community has managed to avoid such delays by focusing on a second level of 
conditionality consisting of a few powerful and effective conditions reflecting the specific 
macro-economic and/or sectoral objectives pursued, although this approach does entail 
the risk of a temporary breakdown in the necessary coordination of the measures 
conducted by the body of international donors as a whole. There is as yet no definitive 
solution to this problem. 
While an adequate degree of non-negotiable detail is essential, common sense dictates the 
.need for a certain amount of flexibility, which will obviously contain elements of 
subjectivity if the aim is to achieve something approaching a fair assessment of national 
constraints. 
The third group of conditions are administrative and financial. Here the Commission has 
developed a range of monitoring and inspection techniques that facilitate the integration 
of Community support into the procedural framework of the country concerned, as 
regards both the provision of foreign exchange and the use of counterpart funds in line 
with strict budgetary procedure. 
Experience has shown that internal procedures and modalities for decision-making and 
payment are ill-suited to the requirements of the adjustment support instrument, where 
the priority is to provide .rapid disbursement without sacrificing any administrative rigour. 
A major drive to rationalize monitoring and decision-making procedures has recently been 
carried out. 
EH. FIRST QUALITATIVE RESULTS 
1. Ill-house 
(a) In addition to the harmonization of internal control procedures and the 
introduction of tailor-made monitoring and inspection procedures in the 
Commission and decentralized procedures at national level, there has been a major 
reorganization which has produced greater coherence among the Community's aid 
instruments, based on their integration with sectoral policies and on a clearer 
perception and better analysis of the macroeconomic situation in each country. 
(b) The Commission has developed its in-house expertise on the horizontal issues that 
are the subject of the Convention's main guidelines for structural adjustment 
support. 
Assessment of the social aspects involved has led to new guidelines on food 
security and nutrition, health, education, training and employment 
One of the main components of the practical procedures for the financial 
implementation of adjustment support is the use of counterpart funds as part of 
a coherent national budget strategy. The Commission has developed a procedure 
based on the Council Resolution of May 1991 whereby a blanket approach is 
adopted to all counterpart funds, irrespective of the instrument by which they are 
generated. . -
It is through the restructuring of public expenditure that help for the priority social 
sectors will have a viable, sustainable impact This explains the Commission's 
10 
increasing involvement in public expenditure reviews, which has entailed 
coordination with the other donors. 
The Commission's development of health, employment, education and training 
policies will facilitate involvement in the social sectors and the related public 
expenditure decisions. 
(c) In line with one of the Convention's main guidelines, a special effort has been 
made to allow for the regional aspects of adjustment, particularly as regards the 
repercussions of national adjustment measures on regional integration policies, and 
the need to tailor national policies to the regional context. The Commission has 
assessed the convergence of national economic policies at regional level and the 
possibility of supporting the establishment of multilateral monitoring schemes in 
some regions. 
(d) As its evaluation of the impact and content of adjustment policies and the 
practical aspects of implementing Community support has taken shape and 
improved, the Commission has launched a series of in-house studies on such 
issues as the sequence of reforms, the effectiveness of foreign exchange allocation 
systems, the pertinence of import programmes and the impact of the tax system 
on income distribution. ••••'.' 
2. At Com m unity level 
The emphasis has been on strengthening coordination with the Member States along the 
following three lines: ^ 
(i) upgrading instruments and implementation procedures by bringing them into line 
with the requirements stipulated by the Member States and matching them to the 
macroeconomic framework within which they operate; 
(ii) developing a Community approach and the makings of a strategy in priority areas 
of Community action, e.g. health and agricultural exports; 
(ill) developing a framework of regular Community consultations prior to and during 
the course of the meetings of major international structural adjustment bodies; the 
structure mainly used for this purpose has so far been the SPA. 
However, Community coordination remains limited and should be further developed. 
3. At international level 
It is probably at this level that the Commission's efforts to gain credibility for a specific 
Community voice have been most successful, particularly in the framework of the SPA. 
11 
(a) The Commission has actively participated and will continue to participate in ad 
hoc working groups on: 
restructuring public expenditure and improving the efficiency of national budget 
procedures through regular public expenditure reviews; 
general studies carried out by a number of bodies to assess the impact and results 
of structural adjustment; 
measures to combat poverty and the integration of this issue in structural 
adjustment programmes. 
(b) Wherever possible, the Commission has urged the importance of various key 
issues, drawing them to thé notice of other major donors 
For example, the link between democracy and adjustment has been the subject of 
in-depth assessment jointly led by the Commission and the United States. The aim 
is first of all to avoid the short-term negative impact of economic reform on 
democratization, e.g. by being more realistic as regards the timing of the 
introduction and intensification of measures, or in respect of the conditions 
imposed. It is also vital to exploit synergies between the two processes: if they 
can be made'-to support each other, the long-term viability of the reforms will be 
better assured. The dialogué that develops in a democracy is the very essence of 
what has become known as the "internalization" of reform programmes; however, 
the democratization process can often be fragile, and such dialogue is bound to 
lead to certain changes which may temporarily halt the reforms in a given 
country. It is hard to strike the correct balance between the social and political 
consequences of the changes ushered in by the imposition of economic discipline 
and the legitimate aspirations of the people; who are entitled to expect positive 
economic results from me reforms. 
A second factor, already emphasized by the Convention and one which should 
become a major element in the adaptation of adjustment policies following the 
Commission's campaigning, is that of the pace of the reforms and the sequence 
in Which they are introduced in line with the specific needs of the country 
i concerned. Several studies are currently being carried^ out with the active 
participation of the Commission, with the aim of striking a balance between the 
sequence of economic and financial policies required by the gravity of the 
situation (e.g. foreign exchange shortages, non-financeable budget deficits or 
r >Kquidity crises), the importance of not stifling investment and the supply side in 
the long term, and thé need to make due allowance for the constraints imposed 
by the social and political liberalization process. 
The third issue actively promoted by the Commission is that of the implications 
of national structural adjustment policies for regional integration prospects, and 
' , more generally, the regional consequences of national policies. This initiative has 
produced work in collaboration with the IBRD, the IMF and other donors such 
as France and the African Development Bank, in West Africa (with the West 
African Economic and Monetary Union), in southern Africa, the Indian Ocean 
(with the Cross Border Initiative) and, nearing completion, in Central Africa. The 
prospects for regional integration or its promotion have never been so positive, or 
so favourable as a path to growth. 
The Community remains a major partner of the ACP countries primarily because 
of the large sums of money made available for long-term investment, long-term 
social and economic development being the Convention's most important 
objective. The sheer scale of the economic and financial problems with which 
most of the countries concerned are confronted could have resulted at one stage 
in long-term development aims being sacrificed to the imperatives of structural 
adjustment, in the guise of restoring the major financial balances. The 
Commission has been campaigning precisely to make its partners aware of the 
need to reconcile the two sets of objectives and procedures. 
The general conclusions of the SPA meeting of November 1993 show that the 
concerns the Commission has been expressing for several years are now on the 
agenda, at least in terms of general principles. Greater attention to the sequence 
of the reforms in forthcoming adjustment programmes and a more realistic 
approach, to the conditions they impose, tailored to local perception and 
implementation capacities, will be a major feature of the third phase of the SPA. 
In the same way, regional integration and trade promotion programmes will be 
broadly integrated into adjustment programmes and supported by specific reforms. 
This change of heart among our partner donors to countries undergoing adjustment 
demonstrates the extent to which participation in the relevant international forums 
can be used to wield influence. At the Commission's instigation a general 
consensus has been achieved on the basis of the main principles underpinning the 
Convention, although much work has still to be done to translate the guidelines 
into practical measures Case by case, country by country, the tasks awaiting the 
development cooperation community are onerous, but thanks in large measure to 
the Community's input, a realistic, practical and humane approach to adjustment 
has begun to emerge. 
(c) To give greater weight to its concerns, the Commission is chairing the working 
groups responsible for the most sensitive issues: 
the link between democracy and adjustment, the aim being to reconcile economic 
reform policies with the realities of democratization; 
public expenditure reviews designed to: improve national budget planning and 
implementation; restructure spending, giving priority to key social services and the 
maintenance of basic infrastructure; improve spending efficiency and safeguard 
donors'financial contributions. 
13 
4. In the recipient countries and regions 
(a) Wherever possible, the Commission participates in the preparation of reform 
programmes, particularly through close involvement in sectoral policies. 
(b) The Commission is increasingly working with the World Bank and other donors 
on public expenditure reviews, focusing its input on sectoral issues in the fields 
of health, education and infrastructure maintenance. 
(c) The Commission is playing an active role in the following three, regional 
programmes currently under way in Africa, all designed to promote - to varying 
degrees - economic integration, customs harmonization, and trade: 
a programme to facilitate intra-regional payments, trade and investment in 
East and southern Africa and the Indian Ocean, 
- a reform programme to set up the West African Economic and Monetary 
_ . "Union; :. \ -• •.'.,•:"" •*' > 
•-• a regional reform programme for the Central African Customs and 
Economic Union; ; 
IV. EFFECTS OF ADJUSTMENT; CONCLUSIONS FOR AND AGAINST 
1. Adjustment: unavoidable, but with ambiguous results 
Structural adjustment has for several years been the subject of debate, criticism and 
controversy and, more recently, there have been numerous evaluations carried out by such 
bodies as the World Bank, the IMF and UNCTAD. The Commission has contributed to 
this debate with its own study, carried out by a team of European researchers, evaluating 
the results of economic reforms introduced by ACP States.2 
One common factor that emerges from all these evaluations is the undoubted difficulty, 
when assessing economic performance, of mechanistically identifying those effects which 
may be ascribed to policy reforms and those which are brought about by external factors. 
In the same way, it is hard to gauge objectively the relative impact of economic recession 
and that of adjustment. 
The second constant is that the African countries have generally been less successful than 
other developing countries, or their economies have suffered more. 
"Adjustment and development - the experience of the ACP States". This study was 
carried out at the request of the Commission by the Centre d'Etudes et de 
Reflexion des Dirigeants mût UK, French and Italian researchers, under the 
direction of Patrick and Sylviane Guillaumont. • 
14 
Some general positive observations can be made about the developing countries as a 
body: 
the countries that have adopted adjustment polices have, on average, achieved 
faster growth (4.2% in 1986-90) than those that have not (2.4%); 
adjustment policies have generally reduced budget deficits, from an average 8.5% 
of GNP in 1980 to 4.2% in 1990 in countries undergoing adjustment, whereas the 
figure has remained a constant 6 5% for the others (though it has to be 
remembered that such reduction was the central aim of the first generation of 
( stabilization programmes); 
inflation has generally been better controlled in countries undergoing adjustment, 
particularly in middle-income countries, by means of extremely tight monetary 
and lending policies, a key feature of stabilization programmes; 
in countries undergoing adjustment, real exchange rates have been brought back 
to levels that are more commensurate with the economic fundamentals. 
Evaluation has also revealed, however, some rather more worrying features: 
structural rigidities have promoted poor resource allocation, to the considerable 
detriment of the social sectors; 
the substantial reductions in public expenditure have been made at the expense of 
maintaining economic and social infrastructure, which has in many cases ceased 
to operate; 
investment has stagnated where it has not decreased.; 
external imbalances deriving from trade and capital transfer trends have not been 
genuinely or durably corrected; 
the external debt situation has not improved, and has in some cases (e.g. Africa) 
deteriorated. 
In other words, financial stabilization has frequently been more or less a success in the 
very short term, but the underlying economic trends have not been reversed and the 
positive effects of adjustment, particularly in terms of growth, have been slow to appear. 
This is certainly the case in Africa, which was recently the subject of an additional World 
Bank study in the context of the SPA ("Adjustment in Africa", March 1994). 
The conclusions of that study are somewhat reserved. While a limited number of 
countries have indeed achieved growth in the agriculture and industry sectors by adopting "• 
the appropriate macroeconomic policies on agriculture and trade, these results are meagre 
when seen in the light of population growth and achievements elsewhere in the world. 
15 
Many countries, struggling increasingly to meet their reform commitments and the 
conditions attached to the support of their donors, have also been obliged more or less 
to abandon, or at least cut, their reform programmes. 
This contrasts with the situation in south and south-east Asia, where the economies of the 
newly industrialized countries are now growing after a brief period of recession. While 
it is true that these countries had fewer macroeconomic problems to start with and already 
possessed a well-developed private sector that proved capable of adapting to structural 
reforms, the key point is that the specifics of their economic policies have been relatively 
varied, and they have been able to adapt to their own circumstances and strategies the 
theoretical models that have generally underpinned orthodox adjustment policy on trade 
liberalization, state interventton in production, and so on. In fact, the only constant 
discernible among these countries - and it is of tremendous significance -is the high 
concentration of qualified human resources compared to the average situation in the ACP 
countries, particularly in Africa. 
The World Bank sought to explain Africa's plight in terms of this lack of qualified human 
resources, also citing its inadequate and dilapidated infrastructure, lack of economic 
diversity, fragile economic fabric, inefficient public institutions and economic distortions 
on a scale not known elsewhere. It concluded that adjustment would take longer than 
expected in the low-income African countries, and that, to attain the target of long-term 
development, considerable sums should be allocated to investment, which had 
unfortunately been neglected in favour of short-term financial programmes over the last 
ten years. 
The Community would certainly endorse this conclusion, having for several years argued 
that adjustment should not be imposed at the expense of the long term, and that short-
term, requirements should not mask the need to finance basic infrastructure, develop 
human resources, ensure food security, etc. 
However, besides purely economic rigidities, there are other factors involved that argue 
in favour of a more realistic approach not only to the results expected from adjustment, 
but also to the definition of its procedures and conditions. 
2. Some critical comments 
The Commission's commitment to a realistic approach, now shared in the SPA context 
as a whole, is based on a critical analysis covering the ACP countries as a body. 
The paper on "Adjustment and development" (see footnote 2) stresses that adjustment has 
encouraged the development of the informal sector, has failed to allow for the long term, 
and has not been "internalized". 
(a) Informal adjustment: there is no doubt that the informal sector has grown 
significantly over the last ten years. This comes as no surprise: Being subject to 
little official regulation, particularly as regards pay and working conditions, and 
.16 
requiring little in the way of capital, the informal sector is well placed to adapt 
spontaneously in line with market trends. In countries obliged to undergo 
structural adjustment to improve competitiveness, the informal sector has a natural 
advantage over the formal. The redundancies that are the inevitable consequence 
of restructuring the public sector have propelled part of the workforce into an 
informal sector already swollen by population growth. 
Attempts to reduce budget deficits by raising taxes in the "modern" sector have" 
also given an advantage to informal businesses that pay little or no tax. 
Official GDP statistics undoubtedly make inadequate allowance for the growth of 
the informal sector. As a consequence current estimates lend undue weight to 
developments in the "modern" sector, which does not reflect the reality of the 
economic situation, particularly in Africa. This observation should go some way 
to tempering the excesses of official pessimism with regard to Africa and its 
underestimation of African capacity to adapt to market trends. However, it also 
underlines the acute difficulties faced by African countries whose "modern" 
sectors are shrinking in relative terms. 
Yet it is this sector that provides governments with their main source of revenue. 
Essential public services and infrastructure that are vital to the development of the 
economy as a whole depend on the growth of this sector. 
Informal adjustment has undoubtedly helped alleviate the social distress caused 
by the reforms, but it has also contributed to the crisis at national level. It can 
therefore never be more than an imperfect, interim phase. 
(b) Short-sighted adjustment: the process has made inadequate provision for the 
requisite complementarities between financial restructuring and long-term 
strategies. 
Adjustment policy is made up of three main complementary aspects: 
macroeconomic stabilization, correction of relative prices, and improvement of 
productivity. In fact, the decisions taken have tended to favour stabilization at the 
expense of correcting price distortions with structural and sectoral reforms even 
further in the rear; these have generally been minimal and without any noticeable 
effect on productivity or the incentives system. Budget allocation trends illustrate 
this clearly. 
The adjustment of public finances has been achieved more by reducing 
expenditure, with no real restructuring, than by boosting revenue; the major tax 
reforms.planned have been applied with great difficulty or not at all. 
As a direct result of this tendency there has been a drastic reduction in public 
investment, which is now insufficient to guarantee the minimum infrastructure and 
maintenance required for the economy to develop. There has also been a major 
17 
drop in health and education spending, which is threatening the very survival of 
these essential public services. 
Between the beginning and end of the 1980s, health and education spending as 
a proportion of total public expenditure fell by an average of six percentage 
points, whereas over the same period in non-ACP countries their shares increased 
by six (education) and four (health) percentage points. 
These cuts obviously have a negative impact on productivity and on long-term 
development in general. 
There are several reasons why long-term interests have been passed over. The first 
is intellectual: while there is little disagreement as to how to control demand, 
there are doubts on how best ta correct prices or gauge the response of economic 
agents and, even more, on how to boost productivity. 
The second reason is to do with the scale of the recession and the urgency of 
finding a response to it. Foreign exchange shortages and liquidity problems 
engendered measures designed to ease the situation rapidly: it is relatively easy 
to reduce spending or alter a customs tariff, but much more difficult and time-
consuming to restructure businesses and liberalize and deregulate the economy. 
The imposition of inflexible conditions, compliance with which can be measured, 
has reinforced the trend, favouring measures having immediate results at the 
expense of far-reaching reforms the outcome of which it is difficult to gauge. 
(c) Borrowed adjustment: national reactions to policies seen as imposed from the 
outside have tended to be shaped by social and political pressures that work 
against the process, in some cases compounded by instinctive reticence in the face 
of economic policies that antagonize vested interest. Adjustment policies have 
frequently been accepted under financial duress, without any genuine conviction 
on the part of the governments concerned and without the willing support of the 
officials responsible for their implementation, not to mention the general public, 
which is still awaiting the economic and social benefits of their young 
democracies. 
The lack of internal acceptance also applies to the conditions attached to 
adjustment, often agreed to simply as a means of securing urgently needed 
financing. Wary donors have reacted by adding new, ever more stringent 
conditions, making them increasingly complex, unrealistic and ultimately 
-impractical. 
The validity of the concept of conditionality is not open to discussion. What is 
debatable, however, is the excessive proliferation of conditions that lack fine 
tuning and fail to take account of the conditions and constraints specific to each 
individual country. 
18 
V. THE WAY FORWARD 
Adjustment is not a fad, but an absolute necessity if financial and budget stability is to 
be restored. There is a consensus that the process is unavoidable, a necessary - though 
not sufficient - condition for growth. However, while the principle of adjustment is 
accepted almost unanimously, opinions are more divided as to the best way to proceed, 
given the conflicting, and indeed disappointing, results achieved by the policies applied 
thus far. Improvements are needed, and in some cases are already in the pipeline^ The 
European Union has championed the need for change, and now has an important role to 
play in promoting and strengthening the changes. It can do this in three ways: by 
consolidating Community action, and by deepening and broadening it. 
1. Consolidation 
Recent analysis endorses the Union's main priorities as expressed in the Lomé 
Convention, namely: overall consistency with the objectives of adjustment; the long-term 
implications of programmes; their social repercussions; and their integration into a 
regional framework. The key policy considerations highlighted by the Convention - the 
social dimension, the regional dimension, the pace of reform, adapting reforms to the 
specific requirements of individual countries, acceptance within the country 
("internalization"), realistic conditions - must remain central to the Union's contributions 
in this field. 
The Commission will therefore continue to argue the case for the recent SPA 
recommendations on adapting the pace and sequence of reforms and structuring 
conditionality in line with the specific requirements of the individual countries, with a 
view to ensuring that these recommendations are duly implemented in practice. 
The Commission will also help promote local acceptance of the adjustment process 
through detailed analysis of national planning, decision-making and implementation 
capacities. The nature of the EU-ACP dialogue, which is characterized by medium-term 
programming and confidence in the availability of resources, is conducive to this purpose. 
2. Deepening 
Structural adjustment must form part of a more general long-term approach aimed at 
developing human resources, rebuilding a healthy economic and social environment and 
revitalizing the supply side. In addition to striking the correct balance between spending 
to support financial restructuring and economic reform, and investment spending, 
long-term aims can be secured by improving the structure of public finance and 
integrating national programmes into the regional framework. 
19 
(a) Public finance 
The Community should continue to attach special importance to the problem of 
public finance, which has become one of the key components of reform and of 
the dialogue with the countries concerned. 
The Community will continue with its role of assisting priority social sectors by 
helping create a genuinely sectoral approach supported by the allocation of 
counterpart funds in coherent, transparent, equitable and well-implemented 
national budgets. The harmonious development of human resources can best be 
achieved through the restructuring of public expenditure. It is essential that the 
' process of economic transition be accompanied in the interests of effectiveness by 
a consistently high level of investment in economic and social infrastructure. 
The focal areas for the investment of Community resources must also be 
broadened, however, to stimulate production and supply, primarily by rationalizing 
and streamlining the state's relations with its suppliers with a view to restoring its 
credibility and the confidence of the business sector. To that end, the Commission 
will give priority to the assessment and monitoring of public expenditure, in 
collaboration with the countries concerned and the other donors. 
(b) Integration into the regional framework 
The integration of national programmes into a regional framework designed to 
promote trade or economic integration will undoubtedly continueto be one of the 
. Commission's main priorities, die aim being; to create a dynamic that transcends 
the economies of individual countries and thus promote the gradual integration of 
the ACP countries into a world economy that is itself in the throes of transition. 
There is a double incentive for the ACP States to incorporate regional integration 
into their national programmes. 
The first is linked to the limitations of national markets. The second is based on 
the new regional integration theory, now held to be an institutional means of 
promoting the adoption of economic policies under partial protection from 
pressures that have a more powerful impact nationally than at regional level. 
These arguments should persuade the ACP countries' international partners to 
support the regional aspects of national adjustment programmes on a systematic 
basis, i.e. automatically including regional integration criteria when formulating 
programmes. They should also persuade them to increase the amount of 
adjustment aid to these countries, as an incentive to integration and also to offset 
the transitional costs that integration can entail, such as loss of tax revenue. ' 
20 
3. Broadening 
The European Union's contribution to improving the adjustment process must undoubtedly 
involve more than consolidating and deepening its current input, though they are essential. 
It must also embrace the adaptation of existing instruments, the search for new types of 
cooperation and recasting of the approach to conditionality. All this will require greater 
coordination. 
(a) Adapting instruments and procedures: the Union must adapt to changing and 
varied situations, with a view to: 
providing direct, targeted budget support for countries with liberalized 
foreign trade and a freely convertible and transferable currency; 
gradually moving towards channelling counterpart funds into a more 
general package, in step with progress in terms of the efficiency and 
internal acceptance of public expenditure reviews used as a tool to keep 
a check on programming and budget implementation. This will involve 
radical changes in the current thinking and methods of the Community's 
supervisory bodies; 
decentralizing implementation monitoring. 
It should be possible to arrange a rapid and flexible reallocation of financial 
resources under a country's adjustment programme to meet exceptional financial 
needs that may arise in certain countries, provided that such reallocations do not 
prejudice development programmes already under way. 
In order to secure greater consistency in its activities and to create adequate 
"critical mass" in terms of both conditionality and financial resources, the Union 
will seek to improve the operational integration of all Community instruments, 
including indicative programmes, adjustment resources, Stabex and food aid. 
(b) Other types of cooperation: monetary matters comprise one area in which the 
Union could promote the reform process in the ACP States, as the Maastricht 
Treaty indeed provides. The disparate nature of the various monetary systems and 
the non-convertible status of most of the ACP currencies have been a major 
handicap to regional integration, while the dearth of foreign exchange has at the 
same time in many cases been an obstacle to economic activity. The international 
community, and especially the EU, can help countries with integration projects in 
the direction of stable exchange rates and greater convertibility. This does not 
mean the monetary integration of the ACP States, Africa or even large subregions. 
It means making Union expertise available to these countries by extending 
cooperation to an area that, while undoubtedly presenting a tough challenge, can 
make a significant contribution to growth and stability. 
21 
(c) New approach to conditionality: there is currently a "conditionality crisis" which 
has led many of those actively involved in the adjustment process to question at 
least the application of the concept, if jibt its validity. There is already a 
', consensus at SPA level in favour of introducing a greater note of realism in the 
definition of conditionality The Commission has played a significant part in 
bringing about this development, and could now contribute further to the debate 
by proposing a different approach to conditionality, more demanding in the long 
term and less rigid in the short term. 
This would involve incorporating into the concept of conditionality general 
economic policy agreements based on a medium-term programme, of which 
specific measures would be but one component. It would also entail the 
introduction of "adjustable" factors that would allow economic policy to be 
steered in response to developments, in the national or international environment. 
Finally, it would mean assessing the real effort made by countries to push through 
their reforms, in the light of material; social and political problems which affect 
economic policy-making, and which may be difficult to overcome. 
Such an approach, by showing greater respect for the internal choices of the 
countries concerned, particularly as regards the sequence of reforms, would 
increase local involvement in reform planning and implementation, and would also 
allow for greater emphasis on factors promoting long-term development. It would 
tend to promote a long-term view, responding to overall progress on a realistic 
basis, rather than reacting to one-off results that can be rapidly overturned. 
In other words, the Commission's proposal to its partner donors would be to 
consider replacing the current conditionality system based on specific instruments 
and results by one based on programmes. 
(d) Strengthening coordination: in an area as politically charged and complex as 
* macroeconomic reform, where no one canclaim to know all the solutions, it is not 
right that the developing countries should be given die impression that they have 
no say,-and that there is a monopoly on macroeconomic expertise. The leadership 
of the key traditional institutions, the World Bank and the IMF, is not in question, 
but the-Commission has developed a degree of expertise and influence in its 
problem assessment and modus operandi which have made a significant 
contribution to the improvements already made to the adjustment process. This 
influence would be greatly enhanced by a concerted coordination effort involving 
not only Community structures but also the recipient countries, and the European 
members of the Boards of the Bretton Woods institutions themselves. For the 
Union, it is a question of credibility as much as efficiency. 
22 
CONCLUSION 
The Community was not involved in the first generation of adjustment programmes, 
entering the debate in 1987 and carrying out its first operations in 1988 through its 
participation in the first phase of the SPA. It was really only with Lomé IV that the 
Community began to play a direct part in the process. 
Since the Convention was signed, the Commission has adopted a wide range of measures 
to give full effect to that participation. The experience gleaned in the intervening years 
has given it the perspective and the know-how to assess more comprehensively the impact 
of adjustment policies and to draw conclusions as to their implications for the future. 
The purpose of this communication is not only to provide factual information on the 
implementation of the Convention's structural adjustment provisions, but also to use that 
experience to contribute to the debate on an aspect of development that is not only crucial 
but also one of the most controversial. 
The Commission remains convinced that adjustment is an essential prerequisite for 
relaunching the growth of the ACP countries' economies and, at a deeper level, for their 
real development. However, adjustment procedures have to be sufficiently realistic and 
innovative to ensure that well-balanced and equitable long-term development is not 
sacrificed in the interests of financial and budget stability, and in order to maximize the 
chances of success of a process that has so far had mixed results. 
That is the essence of the Commission's approach and of the role it intends to play in this 
field. 
23 
ISSN 0254-1475 
GOM(94) 447 final 
DOCUMENTS 
EN 11 
Catalogue number : CB-CO-94-471-EN-C 
ISBN 92-77-81237-0 
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