APPENDIX A

The Role of Economic Reform Programs

Economic reform has been articulated in one form or another throughout the developing world. Over the last three decades, structural adjustment and economic stabilization programs implemented in Sub-Saharan Africa (SSA) by the International Monetary Fund (IMF) and World Bank have sought to reduce what development economists call the main cause of stagnating economies: indebtedness. Along the way, the reform objectives have expanded into the area of promoting long-term growth through greater economic efficiency. Means to this end include decentralizing the government's economic role and encouraging private sector investment.

Background

The IMF has focused on stabilizing the balance of payments while the World Bank has concentrated on fighting poverty and improving economic growth. Policies incorporated in the efforts of both these organizations include eradicating poverty, bringing balance of payments into equilibrium (which implies opening economies to international flows of goods and currencies), and jump-starting debt-ridden, depressed African economies (Onimode, 1989).

An interesting series of events has created this third role, making African countries more dependent on IMF/Bank aid than ever before. The economic situation of the 1980s in Africa has led to it being termed the "Lost Decade" by many economists. Why? There are two distinct opinions. The1970s started with rapid expansion by many newly-independent African countries, mainly caused by favorable terms of trade (e.g., in Zimbabwe). Other SSA countries inherited large debts when they achieved independence. The global economic depression of the 1980s constricted export earnings of most countries, fueling negative balances of trade and in turn balance of payments deficits.

One school of thought, held by the World Bank, IMF, and some academicians, believes this situation resulted from various domestic economic and social ills. Corruption, inefficient economic policies, poor productivity, political instability, and environmental crises have collectively caused the economic crisis, according to this group. The other view is that the conditions inherited by post-colonial governments in addition to the external economic crisis of the 1980s culminated in huge amounts of borrowing from the IMF (since the IMF wants to relieve balance of payments deficits). The borrowing and repayment scheduling has become a major component of the African debt crisis, suggesting that IMF/World Bank programs are encouraging rather than alleviating sputtering economic conditions (Onimode, 1989). Drought leads to worsening debt burdens, as Green (1992) notes that after the 1992 drought in Southern Africa, the inevitable outcome was the inability for reform-minded economies to service their external debt.

Several other factors have prevented SSA economies from breaking through the balance of payments quagmire. First, most SSA exports are low value-added primary commodities whose prices fluctuate dramatically. SSA countries don't produce enough of any agricultural or mineral commodity to influence prices (i.e., they are price-takers), and they sell to international buyers who control large market shares and thus can influence prices (e.g., lower them). Second, developed countries have the ability, through capital-intensive resources, to produce substitutes for traditional SSA exports. For example, a synthetic substitute to the natural insecticide pyrethrum is now being made in the U. S. Pyrethrum used to be one of Kenya's most important agricultural exports.

A third factor preventing positive export generation in SSA countries relates to foreign direct investment. Such investment contributes important inflows of foreign capital and currency. Unfortunately, this is often accompanied by foreign control over decision-making which can include the choice to repatriate future profits. Finally, a commonly cited retinue of conditions including a weak incentive structure for producers, underdeveloped infrastructure, declining international terms of trade for primary commodities, and misallocation of public resources add to the problems (Logan and Mengisteab, 1993).

Economic Structural Adjustment Programs (ESAPs)

Presently, countries desperately seeking to close their balance of payments deficits must meet strict conditions set by the IMF before they can get external loans. These conditions equate to economic austerity measures and are imposed on all third-world borrowers. Conditionalities often linked to IMF aid packages include trade liberalization, government expenditure reduction, currency devaluation, privatization of public enterprises, and lifting of any subsidies and price controls (Onimode, 1989). The IMF and World Bank believe the short-term discomfort involved with such policies will be greatly outweighed by long-term economic recovery and stability. Critics aren't so sure, wondering if the socioeconomic costs of currency devaluation (higher unemployment, food prices and interest rates; and cuts in social programs) are balanced by uncertain future benefits, or whether such costs only compromise possible future benefits (Logan and Mengisteab, 1993).

The IMF and World Bank created the "Economic Structural Adjustment Program" (ESAP) approach as they struggled with economic recovery in Africa in the 1980s. With ESAPs, the two multilateral organizations share responsibilities in managing a country's entire economy. ESAPs are three to five year reform efforts aimed at improving a country's balance of trade and general economic performance. There are three types of ESAPs: expenditure-reducing, expenditure-switching, and institutional reform (Logan and Mengisteab, 1993).

ESAPs have been described as "economic shock treatment" because loans are fast-disbursing, and typically require governments to restrain their spending, purposefully creating an economic deflation. According to Onimode (1989), "After the initial two years, a SAP victim may then have to go through about 8 other three-year programs before pronounced 'cured' or 'fully-adjusted.'"

Effectiveness and Results of ESAPs

During the last two decades, the IMF and World Bank have established economic reform programs in 45 SSA countries. Evaluating them is difficult, because the programs have not had enough time to prove their long-term benefits. As one economist notes, "As yet, there are no clear-cut successes where reform programs have led to economic recovery and sustained growth" (Lancaster, 1991).

General trends among ESAP implementers include falling export prices, greater debt service balances, and stagnant agricultural growth. There are less quantifiable negative effects of such programs as well, such as cutbacks in social welfare programs like health and education. ESAPs also display little understanding of the important social/cultural role of state-owned enterprises, for in trying to "streamline" centralized government, they tamper with well-established socioeconomic class and power structures that also serve traditional tribal and kinship functions.

The most obvious problems in achieving successful economic reform programs include the following: (1) the borrowing country failed to initiate the reforms, (2) other shocks (drought, war, falling commodity prices) overwhelmed reform's progress, and perhaps the main reason (3) African countries (unlike Latin or South American countries, for example) could not expand export production enough to counter restrictions in demand. They simply were rigid and slow to change (Lancaster, 1991).

Common Economic Reform Policies

A very common strategy used by countries to protect their producers and consumers are barriers to external trade, especially imports. Barriers take the form of taxes or tariffs on imported goods, license requirements, and availability of foreign exchange. Extreme government control over trade occurs in countries that have experienced macroeconomic disequilibria or crises.

African countries pursue one of the following trade regimes: "complete or nearly complete government control or rationing of imports, heavy use of nontariff barriers for protectionist purposes, mostly or exclusively tariff-based protection, and free trade" (Krueger, 1978). Barriers are liberalized through structural adjustment. Both Zambia and Zimbabwe have transitioned into the stage of "moderate tariff-based protection." More liberalized trade policies allow for the increased inflow of development-oriented capital and inputs. However, to be fully effective, such policies must be coordinated with appropriate exchange rate (devaluation) strategies.

Exchange rate policies are built around either fixed or flexible exchange rate regimes. Those with fixed exchange rates must resort to tighter fiscal and credit policies to reduce domestic demand and improve BOP (World Bank, 1994). Downward pressure on prices and wages is a means of directing real depreciation. Flexible exchange rate systems can use devaluation to achieve tighter demand (World Bank, 1994).

Devaluations are often related to inflation. The World Bank notes that most African countries need some type of currency devaluation to restore external balance, which suffered from worsening terms of trade. In regaining such a balance, inflation can remain under control, given the right circumstances. In Zimbabwe in 1992, inflation jumped dramatically because of the pressures applied both by drought and the ESAP on prices. An important result of real devaluation is an improved domestic budget situation as revenue outpaces spending. Devaluation increases the domestic purchasing power of external grants, which are important revenue sources. It introduces conditions closer to the world market (especially via higher food and export crop prices) which gives greater production incentives to farmers. Export revenues can also increase via devaluation, especially in mineral-producing and exporting countries (e.g., Nigeria and Zambia).

The Changing Face of Loans

As African countries proved less and less able to repay loans, fewer donors gave assistance. The IMF started strong conditional programs, where stabilization was tied to any debt rescheduling or new external financing (Lancaster, 1991). Member countries could receive IMF assistance with financing provided they accepted ESAPs that entailed currency devaluation, government deficit reduction, and restrictions on domestic credit creation. The typical IMF loan was given in foreign currency, on near commercial terms, and was to be paid back in three to five years.

During the 1980s, the IMF provided external lending for the primary purpose of repaying older loans, contributing little to economic development or sustainability. Eventually, the IMF instituted more lenient loan packages to debt-ridden countries, such as the structural and economic structural adjustment facility (SAF and ESAF), incorporating concessional terms of ten years grace, ten years maturity and 0.5 percent interest into the loans. The World Bank become more involved, and started offering structural and sectoral adjustment programs with conditioned loans on soft terms (10 years grace, 40 years maturity). These programs were geared toward improved economic efficiency, and often contained more wide-ranging and stricter conditions than IMF loans (Lancaster, 1991).

Adjustment imposes large costs on the poor - and has created an eroding standard of living for urban populations. In addition, many investors are wary about entering African economies that have been plagued by political instability, corruption, and economic breakdown. However, such dislocations would likely occur with or without adjustment. Perhaps the greatest problem faced both by reforming countries and the supporting donors is summed up by Lancaster (1991):

The Bank increasingly appears to be taking on responsibility without power over African economic policies, while Africans retain power but diminished responsibility over those same policies" (Appendix C).



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