Chapter

A View from Africa: 1

Editor(s):
Gerald Helleiner
Published Date:
March 1986
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Author(s)
G. Saitoti

It is a time of great hardship for much of the population of our continent, but also, in my view, a time of substantial promise. The problems of Africa in 1985 hardly need elaboration. The view that this is a time of substantial promise for Africa may require some explanation, since so many observers offer little else but gloomy forecasts. My guarded optimism is based on two observations. First, the natural resources of Africa and the potential of its 400 million people, which so excited the world as the continent gained independence in the 1960s, are still there in 1985. Second, everyone concerned with Africa—its people, its governments, its friends among the international agencies and bilateral donors—recognizes that Africa is facing vast problems of development. There is broad consensus on the reasons for our current problems. If recognition of a problem is a first step toward its solution, we are certainly ready for the second step.

This symposium may itself be part of that next step toward Africa’s renewed development. The International Monetary Fund has, to its credit, been playing a far greater role in Africa in recent years than was true in the early post-independence period. Although the Fund’s mode of operation remains close to its traditional role, I sense a growing awareness by Fund officials that the Fund may have to find innovative forms of assistance to contribute to African growth. Fund officials are showing increasing concern about African issues.

What is so special about Africa’s situation in 1985 that we should hold a special symposium on its relations with the Fund? Participants will have many different answers to this question. My answer lies in the vast disparity between Africa’s large economic potential and its current parlous state of economic development. This is a continent of 400 million people, only a tiny fraction of whom are producing up to their potential. Africa’s agriculture can grow a wide variety of tropical and even temperate crops, often at very high yields, and the possibilities for research leading to improved productivity have hardly been touched. Africa’s land is rich in mineral wealth, much of it unexplored, and its rivers contain unexploited potential for power and irrigation. With good economic management, good world market conditions, and more patience than we can perhaps afford, African economies should be capable of producing far more output than at present and of noticeably improving the well-being of their people.

Yet the stark reality of 1985 is so very far from this potential. Our population is growing much too fast, over 3 percent a year, while gross domestic product barely keeps up, having grown at 3.3 percent a year in the 1970s and growing more slowly in the mid-1980s. Moreover, Africa may be going through that part of the demographic transition in which population growth necessarily accelerates before it begins slowing down. In fact, one of Africa’s greatest successes—a marked improvement in the health standards since 1960—only intensifies the population dilemma. The almost chronic drought in the Sahelian region may be causing desertification, a situation made worse by population pressure that leads to overgrazing and deforestation. Agricultural growth for the continent has slowed to 1.4 percent a year, making Africa the only part of the world suffering a decline in per capita food consumption. A continent that should feed itself and even export food finds itself instead increasing food imports by 9 percent a year for the past two decades. Export volumes actually fell during the 1970s, and exports remain heavily concentrated in primary materials. These deep structural weaknesses in our economies manifest themselves in statistics familiar to all participants in Fund discussions: continentwide reserves not far above a month’s imports, high debt service ratios, high government deficits, and savings rates that, at 16 percent, are low by international standards.

No one questions that Africa’s economic ills have structural causes, nor that the cures must also be structural. How, then, can the Fund, which operates primarily on short-term macroeconomic variables, help us toward solutions for structural ills? That, I think, is the core question before us.

The Fund, in its stand-by and extended arrangements, concentrates on a set of short-term macroeconomic policy variables that also have long-run impacts. These variables include the exchange rate, interest rates, external borrowing, domestic credit and the money supply, and government deficits. Sometimes food prices become an issue, as does trade liberalization. Targets based on these policy variables are packaged into what have come to be called “stabilization programs.” Economic stabilization is frequently an essential first step toward long-term structural adjustment, and, as such, contributes to ultimate solutions for deep-seated economic problems. Some of the chosen Fund variables—the exchange rate, interest rates, and food prices, for example—have key roles to play in long-term structural change. So the underlying issue is not the chosen variables or the stabilization package. Rather, the basic problems with the Fund’s assistance are questions of quantity, timing, and conditionality. The Fund lends too little in the light of the required adjustments and expects results too soon.

One-year or even three-year stabilization packages can have remarkable effects in developed or industrial economies. When a country enjoys an array of industries that are competitive or nearly competitive in world markets, a change in the exchange rate can quickly develop new exports and make profitable new ways of replacing imports. When foreign capital flows readily into and out of a country’s financial markets, stabilization is often rewarded with substantial private capital inflows that ease adjustment. When capital markets are well developed, higher interest rates can curb excess demand for loans and even induce new domestic saving, while monetary instruments can work rapidly to influence rates and control the expansion of domestic credit. When rural credit and goods markets work efficiently, high farm prices can quickly stimulate more market grains, and markets will distribute them widely.

By and large, African economies do not meet these conditions. Some of our economies certainly have some elements amenable to rapid response, and in this respect African countries differ from one another. But probably no African country encompasses all, or even most, of the market conditions that would make a one-year stand-by program effective. Our exports are concentrated in a few products, often minerals or tree crops, that need years to yield increased output. The export of these commodities suffers from large swings in prices, too large to permit complete dependence on liberalized markets. Many farmers are not well integrated within the national market and either miss chances to exploit higher prices for cash crops or are unable to procure credit and material inputs needed to increase production. Many of our industries emerged behind high protective barriers and cannot be made competitive with an exchange rate adjustment, however politically or even economically advisable. Capital markets are fragmented and hardly touch some sectors, while credit instruments are poorly developed, leaving central bankers impotent to affect credit conditions in important parts of our economies.

There are solutions to these structural deficiencies, and indeed the typical stabilization package includes some of the solutions. But the solutions involve basic development measures that require years to become effective. What is needed is the amalgamation of segmented markets or even the creation of new markets where highly imperfect ones now exist. This involves action on several fronts: macroeconomic policy adjustments certainly, but also institutional development and change, focused political commitment, and a radical reorientation of administrative practices and attitudes.

Let me illustrate my point with an example from only one of the typical policy changes embodied in Fund stand-by arrangements. Import liberalization and exchange rate management are areas that both the Fund and the World Bank have concentrated upon in recent years. The Fund’s prescription generally involves an initial devaluation, followed by a flexibly managed exchange rate that maintains real incentives to export and to reduce or replace imports. This prescription is accompanied by a relaxation of quantitative controls over imports and thus a greater dependence upon exchange rate management, tariffs, and fiscal and monetary policy to control the demand for imports. This is a sensible path to take over a long period of time, not least because it contains elements that will themselves help break up the structural rigidities of African economies. But in the short term, structural rigidities prevail and counteract the intended effects of policy changes.

I have already mentioned that export response is likely to be long delayed. Aside from Africa’s staple export commodities, which can be expanded only to a limited extent in the short run, we have few alternative export commodities and little existing capacity for manufacturing exports. What is needed is a long period—perhaps three to five years—of enhanced and steadily maintained export incentives to convince farmers and manufacturers that there are profits in producing for export. Only then will they invest in the needed capacity for export. Now what happens if we go too far toward liberalization and exchange rate flexibility? In the face of continuing fluctuations in prices of our primary exports, there will have to be large compensating swings in the exchange rate, as well as changes in fiscal balances and in rates of credit expansion. This would create an environment of changing price incentives that works directly against the steady price signals required by potential investors in new export goods or import substitutes. What we require instead is a gradual shift toward the new regime, backed by substantial balance of payments support to insulate the economy from short, sharp changes in earnings from our traditional exports. This example could be extended to other policies that are part of Fund packages. The Fund ought to help us through this kind of transition, and I believe it wishes to do so. Its style of lending needs to evolve towards larger amounts, committed over longer periods and with more emphasis on longer-term structural changes.

Aside from structural rigidities that prevent rapid responses to Fund policies, African economies face another kind of problem that limits their ability to try stabilization cures. In the long run, I am convinced stabilization and liberalization prescriptions will lead to renewed economic growth. Under these conditions, in most African economies depending foremost on the output of small farms for general prosperity, renewed growth will spread its benefits widely among the population, benefiting small farmers, rural workers, small traders, and those currently unemployed. But we have to deal first with the short run to preserve both basic standards of living and political stability. In some instances, Fund programs jeopardize the well-being of the poorest members of society. In Africa, where poverty is at bare subsistence level for many people, governments have to be careful about prescriptions for longrun recovery that raise prices of commodities essential to the very poor. In redesigning Fund programs to suit the long-run needs of our countries, we have to find innovative mechanisms that accommodate the very poor, especially in the short term.

My description of African economic problems suggests several general lines along which changes in Fund procedures and conditions would be welcome. First and most obviously, we need loans that are larger and cover longer periods for both disbursement and repayment. Second, African countries would be helped by a more flexible approach to the conditions of Fund assistance. In some cases, for example, adverse changes in circumstances may require larger disbursements to support certain policy initiatives, and in such instances it should be possible either to increase the funds available or to scale down our policy ambitions without forfeiting the next tranche of a stand-by. Third, the Fund should become more directly involved in the difficult institutional changes needed to make markets work more effectively and, if necessary, be prepared to lend funds in support of such changes. Finally, the Fund should become more directly concerned about the distributional aspects of their conditions and assistance to ameliorate their effects on the poorest in our societies.

With regard to the international setting in which stabilization and structural adjustment take place, I said earlier that African governments and their people recognize the vast problems facing the continent. Further, we recognize the heavy burden that rests upon our own governments to take the difficult measures necessary to renew economic growth. But we cannot succeed, no matter how bold and effective we may be, unless the international economy supports our efforts. African economies need buoyant, open, and stable world markets in which to sell their exports and purchase their imports, and they need access to capital markets at low cost. Instead, what do we see in the world economy today? We see growing tariff barriers, quotas, and other protective devices imposed precisely by those countries best able to afford the costs of adjustment. African countries have learned the textbook lessons of comparative advantage and want to sell the products of their land and labor to the industrial world. But it often seems that the industrial countries do not truly understand the basis of free trade and prefer to produce themselves many things that we and other developing countries could sell to them at lower cost. This evidence of an inhospitable international environment is discouraging to African governments, especially when those most responsible for it are often those pushing us forcefully toward stabilization and structural adjustment. The Fund itself is not responsible for these hostile policies, but by virtue of its operations it is seen as among those supporting developing countries’ stabilization and adjustment. Therefore, it bears some responsibility to convince the industrial countries to do their own adjusting. Unless the Fund turns its considerable powers of persuasion on the North as well as on the South, it will in effect be asking those with the least economic resources to do most of the adjusting. This is inequitable as well as impractical.

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