Structural Adjustment Programs (Saps) Structural

Structural adjustment programs (SAPs)

Structural Adjustment Programs

Structural adjustment programs are meant to help countries pay down their debt and have more capital, trade, and cash flow. This is done so that they can be not only more economically sound but so they can offer more to other countries, as well. One country that has been the subject of structural adjustment programs is Bolivia. Right now the country's GDP is extremely low, but it has so many natural resources that a lot of people cannot come to terms with why these are not being mined and used to help the country gain more wealth. There were a lot of reasons from the past that kept Bolivia from doing much of anything with its economy but those things are changing now and that means that it is much more likely that the country will show improvement in the future.

The two most common ways that Bolivia could increase would be through foreign direct investment and through improving its sovereign rating so that it would be better able to borrow money. The growth of countries like Bolivia could also have a strong effect on the economy of the world overall. Structural adjustment programs can come in a lot of different forms. They are commonly started by the World Bank or by the International Monetary Fund, but there is more to it than that.

In order to fully understand how businesses in developing countries like Bolivia continue to grow and prosper, there are several issues that one must be aware of. The main concerns are with foreign direct investment (FDI), the growth that is taking place in third world countries, and case studies of various areas such as Bolivia, along with sovereign ratings and how they relate to whether a country receives not only FDI but other funding as well. Bolivia is of great importance when it comes to developing countries and FDI because it has both small and medium-sized businesses, as well as big business, and many of these businesses get financial help from companies and corporations in other countries through foreign direct investment.

It is becoming increasingly difficult, however, for the smaller businesses to receive FDI because big businesses seem to take much of this. They have larger budgets for advertising and they are able to make presentations to companies, banks, and others as to why they should receive the funding. The smaller businesses cannot compete in this way and instead often must try to receive funding from other sources, including their own finances. In addition, it is necessary to look at these issues on a grander scale and not to focus exclusively on one country, or the study loses perspective.

Many smaller businesses end up using the owner's assets to start up and/or to stay afloat, and this has obvious problems. These assets are often needed for other things, and they also can run out quite quickly, leaving the (former) business owner in a great deal of trouble when he cannot pay his bills anymore, his business goes under, and he has nothing left in the bank with which to save himself. When something like this takes place the individual may then end up having to sell assets or property in order to keep the business going or in order to pay bills and get out from under debt that was created through the business. While this is unfortunate it is all too common with small businesses, and this is especially true of third-world and developing countries where banking options are somewhat less than they would be in more developed nations.

It is not only the large businesses in developing countries that get help, although they are the majority, nor is it only the businesses that move from other, more developed countries into less developed ones. All businesses in all countries have the potential to be affected by FDI, but it is used for smaller businesses more often than many people realize, if the business is able to catch the attention of larger corporations and other sources of funding such as the World Bank or other bank credits. For these reasons, FDI will be addressed first here, since an understanding of it is necessary and helpful to the rest of the paper.

Foreign Direct Investment

Foreign direct investment has been around for some time, and it is important to understand this. More recently, however, FDI has moved into many more countries - quite a few of which are still developing, and many of which have a multitude of small businesses, such as those found in many villages and small towns in Bolivia. Those that have invested in already developed countries in the past have, in general, done well with these investments, because the economies of these countries are growing so strongly. However, those that invest in developing countries are also doing well, but in a more long-term way. When someone, or some business, invests in a country that is still developing, there is no great expectation of immediate wealth.

Many of these countries do not have a lot of money, and their economies are troubled and sluggish to some extent. Since the economies of these countries are slow to perform, the businesses that are in these countries have the same problems. This is especially true with the smaller businesses because they are not capable of supporting themselves as strongly as the larger and more established businesses are.

Despite this, however, these countries continue to grow, and they have been doing this more rapidly recently because there is a lot of outsourcing going on and society is becoming much more global. Since these countries are beginning to expand and grow, they are a lot more interesting to investors and other business individuals as well as to international banks and the trading market. As growth increases, the investment that many companies and other countries are making into them will begin to increase as well. In turn, this will also help their growth increase further, boosting economies and prompting others to invest in them more strongly, as well as earning them further trade business.

At this point, it is necessary to understand exactly what foreign direct investment means. According to IMF and OECD, direct investment is a reflection of the aim of obtaining what would be a lasting interest in the economy of an enterprise through money, land, or some other offering to that enterprise. This "lasting interest" implies that there will be a long-term relationship between the investor and the investment enterprise, as well as a significant degree of influence by the investor when it comes to management of the enterprise. Naturally, where foreign direct investment is concerned, this kind of enterprise would be located in a country other than the one that the investor is located in.

In short, therefore, foreign direct investment, or FDI, is when a company in one country provides money, capital, and other resources to expand their business in another country. This country that the company invests in is called the 'host country,' and it often receives many benefits (as well as some problems) from allowing other companies to come in and set up shop there. It is not always the 'host country' however, that is invested in. Sometimes it is just an industry in that country or a specific business that is invested in, and this is often where the small businesses lose out because they are overlooked or not judged to be important enough to be offered the chance at a large amount of FDI. FDI, however, provides many things for both the host country and the company or corporation that has moved in, and this is often a delicate balance that must be adjusted frequently to ensure that there are the minimum number of problems with the maximum number of benefits for everyone that is involved.

The Growth of Third World Countries

Global trade is a large part of the growing trend of globalization that is beginning to encompass almost all industries today, and this includes small businesses in developing countries - especially the Middle East and Africa, which are both at different levels of development but yet are still involved in development. Not everyone, however, understands what globalization actually is. In short, globalization is an "umbrella term" that encompasses many different ideas that include integration, interdependency, and connectivity.

These come in many areas - social, cultural, political, technological, ecological, and economic. The economic issue of globalization is the most important concern for this particular study, based on the examination of small businesses and how they receive their funding. There are many ways that small businesses can get funding, but most of these involve small-scale ways that are not as helpful as the larger banks would be. In addition, all businesses that work globally must deal with other complex issues such as subsidies and countervailing duties.

Subsidies as well as countervailing duties have a great deal of importance where many different countries are concerned. This is especially true of countries that are just developing. Subsidies involve help that is given to other countries so that they can reap more profit from what they are creating and exporting, while countervailing duties work to ensure that the taxes and tariffs that are paid by these countries are not excessive so that profit can still be made. Small businesses contribute a great deal to the exports that are created in these countries but if they cannot get the financing that they need to continue to prosper then they will not be able to contribute to the overall exports of the country.

Third World development is gaining in importance today and a lot of the multilateral trade negotiations which are taking place are changing prospects for many of these countries. It is, therefore, important to look at trade negotiations and what they will cause as they relate to the subsidies and countervailing duties for these countries. For purposes of this section, the United States and Canada, and any subsidies that they give, will not be examined. Instead, the focus will remain on countries that are in the Third World and/or that are just developing.

The growth of Third World countries remains very important because they will affect other countries and therefore it is important to understand the trade negotiations that are taking place within them. Many people do not understand these multilateral trade negotiations, especially where the Third World is concerned. Much of this has to do with how much emphasis is generally placed on North American issues. When too much emphasis is placed on issues in North America, not enough is learned about the rest of the world. Even though issues in North America are clearly important, the Third World must be addressed. In order to understand what is going on throughout the world when it comes to law on an international level, the Third World countries and the trade negotiations that are taking place within them must be addressed and understood.

When looking at subsidies and countervailing duties, the most important things to consider are trade agreements and negotiations. These trade agreements and negotiations will be the main issue that will be addressed here because understanding how they are harming the Third World countries and how this harm could continue well into the future is very important. Even though these Third World countries often need beneficial or extra treatment in order to boost their economic abilities and help their growth, North American countries must also be treated fairly where these agreements are concerned.

Finding a balance between these two things is often difficult and the fact remains that North American countries have much more power when it comes to trade agreements than Third World countries do. Changing this and making it more fair and balanced for everyone will not be something that can be done easily. However, with more understanding regarding the Third World countries, there is a much higher chance that agreements can eventually be reached that will benefit all countries involved and that will be deemed fair by all countries involved. Whether this can actually be accomplished is something that only the future can determine but it is something that these countries can work toward.

Much of the information that needs to be addressed where subsidies and countervailing duties are concerned deals with multilateral trade negotiations. Generally, these are designed to help these Third World countries develop faster economically and have changed a lot of the structure of international investment and trade in the process (Diaz-Alejandro & Helleiner, 1987). In 1995, the World Trade Organization was established and implemented. It was designed to phase in different things for different areas during certain periods of time as part of an agreement reached in the Uruguay Round of trade negotiations (Ho, 1998). This was the eighth trade negotiation that was held under a general agreement on tariffs and trade within the last 50 years (Ho, 1998). Every time that one of these negotiations was held the investment environment and the international trade abilities for developing countries in the Third World were changed in some way.

Because globalization and technology are moving so quickly, and because many parts in the Third World are still very underdeveloped, it is important to look at the environment for investment and trade in the Third World and look at what kind of prospects for the future are seen in the Third World countries. This has a lot of significance, not only for those countries in the Third World, but also for other countries that might have interest in trading with them. If the trades that these countries are able to make with other countries are not acceptable and agreements cannot be reached then the countries that have the goods and the countries that want the goods will both suffer.

Even though it might be oversimplifying the issue a bit, many of the different rounds of trade negotiations can be looked at as being a story of how much autonomy and freedom have changed in Third World countries as they pursue policies that help them develop as nations (Ho, 1998). There are both the new areas and traditional areas where these changes take place (Baughman, Mirus, Morkre, & Spinanger, 1997). In many of the more traditional areas there have been many fights for treatment that Third World countries called special and differential (Ho, 1998). The main focus for many of these trade negotiations has been reducing tariffs in many countries as well as dealing with reciprocal trade agreements and most-favored-nation status (Ho, 1998).

Having special and differential treatment relates not only to autonomy but reciprocation in tariff bargaining as well (Ho, 1998). It also relates to privileges that are expected where exporting is concerned and the autonomy to be able to create and deploy various subsidies (Ho, 1998). Many of these treatments have all but disappeared from the Third World countries and this is making their continued growth very difficult (Choate & Linger, 1988). Many of the North American countries argue very strongly against allowing any type of special and differential treatment for Third World countries and this harms them in specific areas.

The first area where this is a problem deals with industrial products that were imported to countries that were just developing (Ho, 1998). Many of these have tariffs on them but the number of goods that have tariffs went from 22% to 72% (Ho, 1998). This gives a chance to negotiate these tariffs more in future trade negotiations but is difficult for the Third World countries now. The second problem is that the restrictions on specific subsidies were made much tighter and some of the subsidies were prohibited altogether (Ho, 1998).

Even the subsidies that were not prohibited were restricted in many ways (Ho, 1998). When subsidies are restricted there are grace periods that are often granted between countries that are developing and countries that have not yet begun to develop (Ho, 1998). The idea is having a somewhat graduated scale so that all countries can catch up. Even though this is the idea, however, it is not necessarily working in the way that these countries wish it would.

Not all of the problems with the trade agreements were traditional. Some of the new problems deal with investments, intellectual property rights, and autonomy for Third World countries that wanted to pursue policies that would help them develop (Ho, 1998). A lot of these policies were curtailed in many different ways and future negotiations are likely to restrict them more (Ho, 1998). All members of the World Trade Organization must provide patent, copyrights, and trademark protection for certain numbers of years on all services are goods that are covered under any agreement that North American countries follow (Ho, 1998).

This does not seem like a strong burden until one considers the fact that judicial procedures have to be created in order to enforce this type of agreement and this places a large burden on many countries that are still developing their judicial systems and ideas of what is appropriate for their countries (Ho, 1998). Even when countries work together to trade goods and services some countries progress faster than others. Any type of economic analysis will indicate this. Many people that analyze trade have basically ignored how uneven the development and growth is between nations that trade with one another (Ho, 1998).

This unevenness is especially obvious between North American countries and countries in the Third World but this problem was not even addressed until the 1950s (Bhagwati, 1987; Agosin, Tussie, & Crespi, 1995). Many different models for trade between North America and the Third World countries have been created since more attention was placed on this in the 1950s and these include things like some of the declining terms where trade is concerned for many of the exporting companies, how much dominance North American capital actually has, and the lack of technology for use in business and innovation in Third World countries (Ho, 1998).

It is also important, however, to notice that many models have looked in different directions. Many of these look at regional differences between North America and the Third World countries such as the saving and consumption rates, technological issues, and institutional concerns (Ho, 1998). The models then take this information and show that unrestricted trade would provide results that were not favorable (Ho, 1998). In other words, having unrestricted investment coming from North America or having unrestricted trade with North America could actually cause Third World countries to slow their development. This implies that these Third World countries should look for ways that they can have a little bit of control over the investment that comes from North America and the trade with North America (Ho, 1998; Baldwin, 1995; Abreu, 1989).

It is important, because of this, that Third World countries are able to keep the autonomy that they have. Likely, their autonomy has actually already been restricted too much and some of it should be restored to them so that they are able to continue to grow and benefit themselves and others. The outcome that was seen from the last round of trade negotiations dealing with traditional issues such as restricting subsidies and expanding tariffs does not look good for individuals in Third World countries (Ho, 1998). Preserving or extending the gap in technology between Third World countries and North American countries is also a problem because the gap between these two areas is already large. It may get even wider in the future if changes are not made to protect the countries of the Third World (Ho, 1998).

Different types of technology that help meet basic needs such as education, food, health, and housing should be provided to those that are in Third World countries so that the technological differences between those countries and North America is not so great (Ho, 1998). Because of worries regarding these issues, many of the patent laws that are seen in Third World countries have been changed a lot since these countries have gained independence politically (Ho, 1998). The ideas behind these provisions were to help transfer more technology from North America and promote a larger amount of industrialization in Third World countries (Ho, 1998). In other words, the plan was to provide a balance between the interests of the public and the rights of those that had patented ideas or goods. Because so many of the treaties between various countries are so unequal, many developing countries do not have any desire to agree to them or belong to groups that agree to them.

Another important issue is that many of the trade negotiations that have taken place have left out a lot of issues on development and trade, or have not addressed them strongly enough, and this hurts the Third World countries (Ho, 1998). The links between trade and debt, and the primary commodity trades, are areas where trade negotiations have basically been ignored between North America and the Third World countries (Ho, 1998). Stabilizing the earnings that come from exports and creating terms of trade for commodities have not been issues that have been negotiable by Third World countries and those that have a lot of problems with debt do not have any kind of way to link trade to debt so that they can generate earnings based on the exports in order to pay off the debt that they have (Ho, 1998).

These countries are basically trapped at this point and they are largely at the mercy of the larger and more powerful countries such as those in North America. It is important for these countries to find a way to break free from this problem but this is not something that is going to be easy for them to do. There is still much that has to be done in these countries and more trade agreements will certainly take place (Ho, 1998). The problem with these trade negotiations and agreements is that they very often do not give the Third World countries a chance to make their voices heard properly. These Third World countries are still just developing and so they do not have the power to demand changes in agreements that they have with North America (Ho, 1998).

This can cause them many problems due to the fact that they are stuck with what they can get from these countries as opposed to being able to set some of their own terms. If these countries could set many of the terms and conditions for trade in their countries they would likely do much better. However, this is not something that should be taken lightly because many of the changes that these countries might make would benefit them so strongly that they would not benefit other countries at all (Ho, 1998). Even though Third World countries have struggled for quite some time and they need to have some special treatment at this point in order to catch up technologically and in other ways with North American countries, this does not mean that they should be handed everything and that North American countries should receive nothing in return for what they give to these countries.

This is also unfair and would soon sway the balance of power away from North American countries and into the hands of Third World countries. Instead, a compromise must be reached between the North American countries and the Third World countries so that the Third World countries can still receive enough beneficial treatment to improve their financial and technological development in their nations while insuring that the North American countries do not suffer from the changes that need to be made to allow the growth of these Third World countries. There will undoubtedly be many more trade negotiations and what will happen in the future still remains to be seen where Third World countries and the power that they have over any of these negotiations is concerned.

History of Sovereign Ratings

Sovereign credit ratings have only been around since approximately 1979, but they have begun to rise dramatically in recent years and the demand for them is only going to increase (Altman & Kao, 1991; Billet, 1996; Lamy & Thompson, 1988; Ederington, Yawitz, and Roberts, 1987). These ratings help to reduce the uncertainty that investors have regarding their exposure to risk and so getting a strong sovereign rating has enabled quite a few governments to get access to ratings on an international scale (Kaplan & Urwitz, 1979; Weinstein, 1977; Wakeman, 1984). Some of these countries have a prior history of default on their debts but if they are able to perform well enough in the current day to receive a strong rating they will be generally safe from lack of investment. This is particularly important to developing countries that still have relatively strong economies (Taylor, 1995; Saini & Bates, 1984).

It may seem strange to some that the sovereign ratings have only been around for a short period of time because many of the ratings companies have been around for much longer than that. For example, Moody's has been involved with the rating of bonds that have been issued by foreign governments since approximately 1919 (Branston, 1994; Cantor & Packer, 1994). The markets for international bonds were extremely active early in the 20th century and by 1929 Moody's was rating various bonds that had been issued by approximately 50 different governments (Bulow & Rogoff, 1989; Hickman & Bradford, 1958; Lee, 1993).

There was a demand for sovereign ratings that far back in time but when the Great Depression hit this demand abated quite strongly (Eaton, Gersovitz, and Stiglitz, 1986; Suter, 1992; Mintz, 1951). After World War II was over there was a virtual standstill within the bond markets on an international level and therefore there was no interest in sovereign ratings at that time (Purcell, Brown, Chang, & Damrau, 1993; Longstaff & Schwartz, 1994). The international bond markets were generally revived in the 1970s but still there was little demand for any type of sovereign rating (South, 1994; Moody's, 1981). Even two decades ago there was only approximately 15 newly rated sovereigns (Branston, 1994). While sovereign ratings are thought to be very important, more recent history still suggests the fact that lending to sovereigns remains extremely risky (Branston, 1994). A survey taken by Standard & Poor's that dealt with 72 governments and looked at the debt based on outstanding foreign and domestic currency indicated that 30 of these had defaulted at least one time on either foreign or domestic currency debt since 1970 (Beers, 1995).

Methodologies Used by Rating Agencies

Sovereign ratings are generally correlated with credit spreads but market determinants and bond yield movement as well as other market spreads are also affected by the ratings (Hite & Warga, Hand, Holthausen, & Leftwich, 1992; Moon & Stotsky, 1993). Both Moody's and Standard & Poor's use six factors to determine the sovereign credit ratings. These include gross domestic product growth, external debt, inflation, per capita income, economic development levels, and a history of default on other loans (Moody's, 1991; Moody's, 1995; Standard & Poor's, 1994). The demand for these sovereign ratings has increased very strongly in recent years and there are many more governments that have a high default risk and companies that are housed in more risky host countries that are borrowing from the international bond market (Ozler, 1991).

Generally, officials of foreign governments cooperate with the rating agencies but many of the rating assignments are much lower than expected and this prompts the issuers to question the rationale and the consistency of these sovereign ratings. Whether the criteria underlying them are clear and how much of an impact the ratings have on the borrowing cost for these individuals is important (Pinches & Singleton, 1978). Analyzing the impact that is seen by sovereign ratings and the determinants that are utilized is very important and has only been possible for approximately a decade because sovereign ratings have grown so rapidly. Both Standard & Poor's and Moody's use somewhat different means to come about their ratings but there is a small number of criteria that are generally well-defined and the two agencies look at these in a similar manner.

The credit ratings do appear to have some influence on various yields that are over and above the actual correlation with other information that is publicly available (Lee, 1993; Mikkelson & Partch, 1986). Announcements also have strong and immediate effects on market pricing for issues that are not investment grade (McFadden, Echaus, Feder, Hajivassiliou, & O'Connell, 1985). Sovereign ratings are basically assessments of whether or not a borrower will repay its obligation. Governments look for credit ratings to help their own access and access of others that live within their borders to international capital markets (Billet, Matthew, Garfinkel, & O'Neal, 1995). Many investors, particularly those in the United States, prefer to have rated securities over unrated securities that have similar credit risks.