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The Challenges of Development

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1992
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Some lessons of history for Sub-Saharan Africa

For the developing world as a whole, the past 25 years have seen unprecedented progress:

  • Per-capita income in low-income countries has nearly doubled over the last generation—growing faster than the United Kingdom during the Industrial Revolution, faster than the United States in its period of rapid growth as it came to economic maturity, and faster than Japan during its prewar growth spurt;

  • Life expectancy has increased by ten years—twice the gain the United States could achieve by eliminating both cancer and heart disease; and

  • Infant mortality rates have been nearly halved, child death rates have plummeted, and immunization rates have skyrocketed.

But this impressive overall performance conceals an extremely uneven pattern of progress. While some countries in East Asia have seen their incomes double and then double again, 36 nations are poorer today than they were a generation ago (see table)—19 of them in Sub-Saharan Africa. One in every two Africans lives in a nation that has lost ground over the last 25 years, compared with only one in 20 Asians or one in four Latin Americans (see chart), meaning social development has stagnated or even suffered reversals. In many African countries today, children are more likely to have their development stunted by lower birth weight, higher malnutrition, and poorer access to primary education than their siblings born in the late 1970s and early 1980s.

Why, in the face of so much progress, have 36 countries with a combined population of over half a billion people actually regressed? The World Bank’s 1991 World Development Report—which traces the development record of the last 45 years, drawing on a wealth of Bank research and institutional experience, including the Long-Term Perspective Study of Sub-Saharan Africa— provides two explanations:

  • First, national development failures are the fault of national policies—they cannot be blamed on a hostile international environment, or physical limits to growth; and

  • Second, national policies have failed when governments thwarted progress, supplanting markets rather than supporting them.

Countries whose constant dollar GNP per capita was lower in 1989 than In 1965

AFRICALATIN AMERICAASIA
BeninArgentinaBangladesh
BurundiBoliviaNepal
ChadChilePakistan
EthiopiaDominican RepublicSri Lanka
GambiaGuatemalaSyria
GhanaGuyana
MadagascarHonduras
MalawiJamaica
MauritaniaPanama
NigerPeru
NigeriaVenezuela
SenegalUruguay
Somalia
Tanzania
Togo
Uganda
Zaïre
Zambia
Zimbabwe
Source: The World Bank.Note: The constant dollar GNP per capita is based upon World Bank Atlas GNP per capita in dollars deflated by a US GDP deflator into 1989 dollars (1965=26.7) Growth rates of constant price, local currency, GNP per capita may differ substantially due to exchange rate changes.
Source: The World Bank.Note: The constant dollar GNP per capita is based upon World Bank Atlas GNP per capita in dollars deflated by a US GDP deflator into 1989 dollars (1965=26.7) Growth rates of constant price, local currency, GNP per capita may differ substantially due to exchange rate changes.

Why has development failed?

In searching for an answer to this difficult question, several reasons are often cited that seem to absolve national governments of re-sponsibility. Perhaps the least plausible is a lack of foreign aid. Just look across continents—Africa received 8 percent of its income in foreign aid in 1989, much higher than the 1.7 percent for South Asia, 0.7 percent for East Asia, and 0.4 percent for Latin America. Eastern Europe dreams of, but does not expect to receive, 2 percent of its income in foreign assistance. True, Africa is poor so its aid share in income looks big. But Africa received four times as much assistance per person as Asia in 1989, and Africa’s share of world aid has risen even as it has fallen further behind.

What about terms of trade? Terms of trade have turned against some commodity exporters in recent years, and many are on the list of countries that have regressed But this can hardly explain why some countries succeeded while others failed. A comparison is telling. In 1965, Thailand was poorer than Ghana, Uganda, and Niger, and even as late as 1970, was more dependent on commodity exports than Kenya or Cote d’lvoire. Yet today, Thailand is emerging as a newly industrialized economy, with manufactures accounting for more than half of exports.

Despite all the complaints about declining terms of trade, African countries have not fared well in maintaining their share of the market. From 1970 to 1986, Ghana’s share of cocoa exports slipped from 29 percent to 8 percent, Uganda’s share of coffee exports fell by almost 50 percent, and Sudan’s share of cocoa exports dropped by more than half. If Africa had simply managed to maintain its share, it would have enjoyed an additional $10 billion in export revenues—a figure approaching its total foreign aid receipts.

What about debt? Africa’s debt burden is crushing, and there is no realistic prospect of the debts being repaid. But those burdens are a consequence, not a cause, of the miserable return that has been earned on the investments that debt financed. In 1980, the ratio of debt to GNP was 49 percent in South Korea and 28 percent in Indonesia, compared to 9 percent in Nigeria, 29 percent in Ghana, 33 percent in Zaire and 50 percent in Tanzania and Kenya. Debt did not stop these two Asian countries from prospering, and it need not have stopped any African nation. Of course, what is past is past, and as shall be indicated later on, there is a compelling case for debt reduction when and if countries undertake serious reforms in their policy environment.

Finally, what about inherent absolute physical limitations on nations’ ability to provide for growth? In some cases of regress, Argentina for example, this clearly does not apply. Nor is it very persuasive in Africa. Agricultural yields per hectare have more than doubled over the last 30 years in the developing world, but they have risen by less than 30 percent in Africa. There is no question that with proper incentives for farmers and adequate infrastructures, Africa could greatly expand its food output.

Policies that work

Where then can we turn for guidance? Certainly, there is one simple but often neglected lesson: War stops development. Almost all of the 36 countries that have lost ground over the last 25 years have been involved in a substantial military conflict. The Middle East is often thought of as the world’s tinderbox; yet relative to population, Africans have three times as high a war fatality rate. In the last 30 years, wars have claimed nearly seven million victims, either directly or indirectly, by making the provision of food and basic social services difficult or impossible. Today, post-Cold War, the threat of “hot” war in Africa persists. Sub-Saharan African governments spend four times as much on the military as on health, and equal amounts on the military and education. By contrast, in East Asia, spending on both health and education far exceeds military outlays.

But what else does the development record have to offer? A review of the successes and failures suggests four key lessons about government policies. In essence: governments that fail do too much and do it badly; successful governments do less and do it better.

Africa left behind

GNP per capita (1960=100)

Citation: 29, 1; 10.5089/9781451953060.022.A002

Source: The World Bank.

Sound macroeconomic policies with sustainable fiscal deficits and realistic exchange rates are a prerequisite to progress. Large government budget deficits absorb domestic saving and foreign funds that could otherwise be channeled to the private sector. They crowd out more productive investments, frequently placing the financial system under great strain. Often they induce rapid inflation, which exacerbates the deficit, creating a vicious cycle. Deficits also lead to overvalued exchange rates, thereby stifling exports, damaging domestic producers, and creating pressures for protectionism. Look at Zaire and Thailand in the late 1980s. Thailand enjoyed stable rapid growth with low deficits, while Zaire suffered large deficits and bore the consequences in terms of lost export competitiveness, reduced private investment, and slow growth.

If persistent government budget deficits are the surest route to economic failure, an artificially overvalued exchange rate must be the runner up. Overvaluation leads to the rationing of foreign exchange, which historically means that those in government and their friends skim off large rents. It creates pressure for layer after layer of controls on imports, capital flows, and even travel. It also destroys emerging export industries, perhaps the most important foundation for growth.

There is an easy and reliable way to identify unrealistic exchange rate policies: compare the official rate with the parallel market rate. Studies demonstrate that when the spread is wide, growth slows, returns on investment decline, and the prospect of financial crisis and capital flight increases. That a strong currency makes for a strong economy is a particularly damaging myth. The Asian success stories were all built around the export growth created by low, realistic, real exchange rates. In 1970, Indonesia’s manufactured exports in 1970 were less than Nigeria’s and are now 36 times as large, and Malaysia’s were three and a half times Kenya’s and are now 52 times bigger.

A permissive rather than a prohibitive policy environment is essential for the private sector. The great debate over economic systems is now over. Almost no one disagrees that communism is the longest way from capitalism to capitalism. For all their faults, competitive markets are the best way man has yet found to get goods and services produced efficiently.

What does creating a permissive environment for the private sector entail? One thing it means is avoiding government monopolies or punitive regulations. The tremendous success of the Nigerians in abolishing agricultural marketing boards and moving toward a realistic exchange rate is clear. Output of a number of key export crops, including cocoa, has increased by more than 50 percent since low points reached in the mid-1980s. Indeed, the production of both rubber and cotton has quadrupled since 1986; soybean production and processing has risen even more.

A permissive environment also means allowing market forces to determine prices without price controls or large subsidies. Fertilizer policies in many African countries exemplify what is wrong with price controls—the resulting rationing implies that some well-connected farmers secure large amounts of fertilizer at low cost, while those less well-connected find fertilizer less available and more expensive.

Finally, a permissive environment is one where government seeks to reduce rather than increase the cost of doing business. That means lowering tariffs and quotas on crucial intermediate and capital goods. According to a recent study, investment costs are 50 percent higher in Africa than in South Asia, and this is just the cost of capital goods, with no account taken of the additional costs caused by the inefficient provision of infrastructure. The need for business to maintain their own capacity for generating electricity is an example.

Government has no business attempting to directly manage the production of private goods and services. Around the world, the record of public enterprise management is one of disaster. While it may be true in theory that a properly managed public enterprise can be as productive and efficient as a private one, the reality is that politics, usually of a virulent nature, intrudes, and efficiency is sacrificed. Public enterprise managers are rarely permitted to shed labor to produce at minimum cost. Moreover, procurement is often treated as a way of enriching contractors and procurement officers.

Nigeria appears to provide almost a textbook example of what can go wrong when the government gets directly into the business of producing goods and services. Between 1973 and 1990, the Nigerian public sector invested $115 billion, just about $1,000 for every citizen. Yet there is no growth to show for this investment. Why? Most of the investment was greatly overpriced for “non-commercial” reasons. In addition, most public sector assets are operating at capacity utilization of less than 40 percent. This is not to mention the $3 billion Ajaokuta Steel complex, which, after another $1 billion to complete, will then lose money even on a sunk cost basis.

It does not have to be this way. Look at the difference between oil refineries run by private firms and those that are public. Look at the difference between hotels maintained privately and publicly. Relying on the private sector to undertake major investments, Nigeria could have achieved the same output with up to $80 billion less investment over the last 18 years since the oil boom.

No country has ever developed without adequate provision of basic investment in infrastructure and in people. Governments that spread themselves too thin inevitably find themselves neglecting the tasks that only they can perform. Experience suggests that governments that stay out of the production business, as did many in East Asia, provide more effectively for schooling and health care and create better infrastructure foundations for private business.

Small amounts of public investment in key sectors, such as agriculture, can make a huge difference. For example, small-scale, relatively cheap irrigation schemes and the basic tasks of agricultural research and extension are neglected, while large outlays are allocated for fertilizer subsidies in many countries. Similarly, a classic pattern is overinvestment in new physical facilities and underinvestment in repair and maintenance.

Human investments are especially important. The two greatest threats to Africa’s future are the investments that are being neglected in primary education and in food security. A child born in Mali, Niger, or Burkina Faso today is more likely to be malnourished while under five than to go to primary school on reaching six, and in at least 16 African countries, a child is more likely to die before the age of five than to attend secondary school. Ironically, the public sector workforce is often neglected even as employment expands. Teachers’ real wages fell by two thirds over the last 15 years in Nigeria and by 13 percent in eastern and southern Africa from 1980 to 1985. It is hardly surprising that education deteriorates. In nations where the quality of education and health care are rising, the salaries of teachers and nurses are increasing as well.

The two greatest threats to Africa’s future are the investments that are being neglected in primary education and in food security.

The case for adjustment

These four principles underlie the adjustment programs that the Bank now supports—and has supported—in many African countries. They reject the heavy-handed government policies of the past, instead looking to governments to provide necessary basic services and positive support to the market Tanzania’s plight in the 1980s had as much to do with a decline in the provision of public services as with the mess policies had made of resource allocation in the production of private goods. Reform of public sector management and expansion of physical and social infrastructure will be essential to success. This can only occur, however, if growth takes off in goods production, which depends in turn upon an enabling environment for the private sector—a tough recipe to fill.

As a Ghanaian official recently put it: “We need two legs to walk on—a strong and effective state and a strong private sector; we have neither and are not likely to have either any time soon. We are like a cripple I saw recently with no legs, pushing himself around on a crude board with wheels, surviving only by begging and trying to look sympathetic to the potential alms giver.”

Some critics allege, however, that the adjustment programs lack a human face. There is no question that Africa’s crisis has produced welfare declines—incomes have fallen, and amongst African countries forced to cut overall spending, real social spending per head decreased 26 percent between 1980 and 1985. But this reduction was largely forced by the overall drop in national income and the necessity to deal with unsustainable budget deficits. Governments actually went some way to protect social spending, which rose from 23 to 26 percent of total non-interest spending for this group. Yet undoubtedly, more needs to be done.

In the course of the 1980s, the Bank has paid increasing attention to this issue, emphasizing improved social service delivery and the protection of education and health spending, especially at the primary levels. A third of adjustment loans involved conditional social sector spending in 1989-90, up sharply from only 7 percent in the first half of the decade. Yet social sector improvement is only possible if governments have the political courage to come down on weak programs rather than weak claimants.

Some critics also assert that devaluation or the elimination of subsidies further impoverishes the poor. This is a misconception. Subsidies and exchange controls redistribute purchasing power—they do not create it. Prior to reform, the poor in countries like Mozambique or Tanzania often received the worst of both worlds, purchasing goods at high parallel market prices, while selling their own produce at depressed official prices. When markets were (partially) liberalized in Tanzania, rural welfare improved immensely, simply because goods became available again. While it is true that urban wages have declined drastically in many countries, the primary reason was the collapse of urban labor demand as attempts to pursue inefficiently capital-intensive and public sector-led growth fell apart. Where adjustment has been consistently pursued and growth is coming back, as in Ghana, urban wages have begun to recover as well.

Finally, some critics assert that trade liberalization does not work, because either local producers will not respond or foreign markets will be closed. At least in the case of Africa, the idea that closed foreign markets inhibit exports is not tenable. Africa’s share in worldwide exports has plummeted over the last two decades, while East Asian countries have increased their share in commodity and non-commodity markets. In the 1980s, even large developing countries such as China and Mexico sharply boosted their shares of world markets. Because of poor infrastructure and weaker market institutions, supply responses will sometimes be slower in Africa, but evidence demonstrates that producers do respond when given the proper incentives and the tools to work with. Indeed, Tanzania’s urban informal sector is estimated to have tripled in size since the mid-1980s.

Some final thoughts…

Nations control their own economic destiny. But this is not to deny that the developed world has a continuing obligation to Africa. At a minimum, it is high time that as African governments act to provide a sensible framework for private production and cut wasteful spending, major creditors respond by negotiating substantial reductions in debt service.

For most of the 1980s, both private and official creditors pretended that African countries could service their debt and rescheduling was the order of the day. With low-income African nations only making 42 percent of their scheduled payments this year and Côte d’Ivoire’s private debt trading at 5 percent of its face value, this is clearly untenable. Even with export-promoting policies, the only good chance most African countries have of achieving a sustainable balance of payments position in the 1990s is through a large reduction in private and official debt (the latter, on Trinidad terms, for example) and higher aid flows. This only makes sense, however, if the resources are likely to be used wisely, not squandered on inappropriate industries, unnecessary public spending, or in support of overvalued exchange rates.

There are widespread fears that with the focus of foreign aid donors’ attention turning to the former Soviet bloc, Africa will be marginalized. But these fears are overdone. For instance, the Bank is lending less as an institution than it could be. Much greater is the risk that an impatient world will stop aid to help those who are not seen to help themselves. Foreign private capital is unlikely to flow to countries that cannot even succeed in attracting their own citizen’s capital. Moreover, government aid to Africa is threatened by the perception that too many African governments are “kleptocracies.”

Can the next two decades be better than the last two? If African nations learn from worldwide experience and put into action the above-mentioned principles, there is no reason why living standards in Africa cannot double over the next generation. But there is one lesson to keep in mind: Takeoff takes longer than one expects but then happens faster than one expects. Who could have ex-pected even five years ago that Mexico would today be wrestling with the problem of how to manage capital inflows from the United States?

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