New Labor Dynamics of Global Public Finance System

The Effect of Structural Adjustment Programs on Growth and Employment

There are direct and indirect effects of structural adjustment programs on labor. Structural adjustment programs influence macroeconomic variables and so employment. This effect can be regarded as indirect because it works via the channel of main macroeconomic variables. The growth rates is one of the most important variables related with employment.

There is convincing evidence that IMF programs hurt economic growth and labor. Vreeland (2000) present one of the studies indicating a negative relationship between growth rates and structural adjustment programs. According to this study, the slowdown of economic growth is accompanied by reduction of labor share in manufacturing industry in the countries under IMF program. This fact also explains why IMF programs are chosen by countries at the expense of reduction of economic growth. Capital gains more than labor under these policies. This means that poorer groups loses but richer groups are getting richer under such policies.

The methodology of Vreeland (2000) corrects the selection problem by using Heckman’s selection correction approach for the data set of countries. The selection problem occurs because the countries choosing to enter into an IMF program are different from those that didn’t apply an IMF program. An estimation ignoring these differences provides biased results. Vreeland’s correct this problem and finds out that IMF programs deteriorate the income of workers. The share of capital is increased by the programs however growth rates become also lower. This means that even capital can lose in the long run due to lower growth rates under structural adjustment programs.