A View from Africa: 2

Gerald Helleiner
Published Date:
March 1986
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C.M. Nyirabu

No one would be happier than I if I am proved wrong on this point, but I believe that the excellent relationship between the Fund and its African members in the early years of their membership in that organization unfortunately no longer exists. There is a feeling that neither side understands the difficulties of the other. There is no meeting of minds either on the diagnosis of the present ills of Africa or on the remedies prescribed for their cure. Such a state of affairs should not be allowed to persist, for it is certainly neither in the interest of Africa nor in the interest of the Fund. This situation makes it difficult both for African countries to make progress and for the Fund to achieve its fundamental objectives of contributing to the promotion and maintenance of high levels of employment and real income. It is crucially important to clear up this situation so that the earlier harmonious relationship between the Fund and its African members will be restored, and both sides will be able to make progress in a spirit of mutual understanding and cooperation.

Many excellent, detailed studies diagnosing our present ills have been made by international, regional, and national organizations, and by individual scholars. I think there is a unanimity of opinion that these ills are the combined result of severe exogenous shocks, such as the steep oil-price escalations in the last decade, persistent drought, prolonged recession in industrial countries and their resort to increased protectionism, continued policies of strict monetarism, and reduction in real terms of external assistance. Our own mistakes in investment allocation—in many cases aided and abetted by aid donors—or in management of the economy, coupled with certain longterm trends, such as rapidly increasing population, declining demand for our exports, principally of primary goods, and increasing competition from synthetic substitutes developed by the industrial countries, have contributed to these ills.

I specified persistent and recurrent drought among the exogenous factors that have strained many African economies. Let me elaborate on this. Half of Africa’s nations lie partly or completely in arid or semi-arid zones. Drought occurs somewhere in Africa every year; two or more droughts affecting large areas of the continent occur every decade; and extremely protracted and widespread droughts occur about once every 30 years. Since 1965 average annual rainfall in Africa has been significantly lower than over the previous 20 years. The net result of successive recent calamities is that Africa has moved from an earlier self-sufficiency in food and agricultural products to present deficits, which are on the increase. While the rate of growth of food production has been on the decline, the growth rate of population has not abated. In fact, estimates of population growth rates of the low-income developing countries point to a disturbing upward trend. The cumulative impact of both these factors is seen in the widening gap between the availability of food and the demand for it. The continent thus has to live with the frightening prospect of dependence on other countries for feeding its millions. It is a paradox that a continent with relatively high per capita availability of land has to import food from countries with less land. We have to improve the productivity of land use. This is a herculean task, but, given the will and international cooperation, it is not impossible. We have seen that other countries that were once importers of food grains have not only turned the trade corner, but are in a position to create adequate reserve stocks of food for effective management of domestic supply.

With only very few exceptions, the developing countries in Africa are industrially undeveloped, with the result that they have to import many manufactured consumer items from the industrial world. The prices of these manufactured items rise with every bout of inflation in the producing countries. The export receipts of the African countries, on the other hand, do not show corresponding growth because our exports consist of primary products, many of them agricultural. Exportable surpluses are dwindling because of erratic production trends and uncertainties of climatic conditions, and demand for them is limited by the user countries’ increasing resort to synthetic substitutes. We therefore have to export much larger volumes than we did a few years back to import a given quantity of our consumer basket.

The long-term solution to our present day maladies lies in improving the productivity of land and in rapidly industrializing the continent. We need external resources for this restructuring of our economies. Unfortunately, the outlook in this regard is dismal. The African countries are already indebted to the extent of over $100 billion. In addition, many countries have substantial short-term debt comprised of trade and services credits and arrears on payments. Delays and defaults in payment of trade bills have choked off imports and thereby strangled vital sectors of many national economies. Many export-oriented units with large import content in their products have to work at suboptimal levels, causing further reduction in export receipts. The vicious circle revolves, pushing these countries deeper into debt. The level of debt of African countries is estimated to be around 40 percent of gross domestic product and equal to some 20 months of their export earnings. The yearly flow of resources from Africa to lender countries by way of debt service is of the order of $17 billion. Apart from these frightening statistics, what is even more disturbing from the point of view of future prospects is the hardening—in all respects—of the terms of new loans. Interest rates are rising, the maturity and grace periods are shortening, and the grant element is being reduced. We are guilty of passing a heavy backlog of debt to the next generation. We could feel less remorse if, along with the debt, we also bequeath them a larger production base and a sound infrastructure. To accomplish this, however, we need to tighten our belts further and reduce consumption so that the resources thus saved can be employed in capital formation.

Domestic savings mobilization is low in African countries relative to other regions. What is more serious, the savings ratio has been declining in recent times. In turn, the domestic resource gap is widening. All are aware of the high dependence of the level of savings on the level of income and on the structure of national economies. Income levels in African countries are generally low and economic bases fragile. Added to these disadvantages, the trend in international economics in recent years has been unfavorable, particularly to African countries, and again this is partly because of the economic structure we have inherited. Appropriate institutions and mechanisms for the mobilization of savings are lacking in African countries. Our institutions need to be restructured and our policies reexamined. There is perhaps little we can do as individual countries about the deteriorating international economic situation, but there is certainly something we can do—and we are doing—about our own institutions and the organization of our own savings and capital formation. In fact, we are quite aware that unless we take measures to raise the levels of domestic savings in our African countries, our economic position and our already low standard of living will deteriorate further.

The damage which these current ills and misfortunes have done to the young developing economies of Africa is deep and extensive, and right now all of us in Africa are still bewildered about what shocks are in store for us and about how to cope with the day-to-day business of managing our economies. Even if there are no more shocks, it will take considerable time before this damage is repaired and we are able to resume the normal path of economic development. The problem of structural readjustment is truly formidable. Even in the better-off countries in our part of the world, the level of domestic resources has fallen so much that very little is available for investment. In the low-income countries even current consumption, at the already low standards of the 1970s, cannot in most cases be maintained. The need for external resources for many of us is not so much for project investment as for sheer maintenance of the economy.

In most of our economies we cannot operate our present capital stock at anything like optimum capacity, primarily because we can no longer afford imported inputs. This is independent of whether these inputs are a high or low percentage of final output; so long as domestic substitutes are not available, cuts in operating imports mean cuts in capacity utilization and domestic value added. Equally, we cannot afford foreign exchange for spares and replacements to maintain our existing capital stock. In these circumstances project aid that neither leads to net export increases nor substitutes for existing import needs is not helpful. It merely adds to the overall level of unusable, unmaintainable capital stock. A far higher share of foreign exchange devoted to operating, maintaining, and rehabilitating inputs and to efficient export development and import substitution would, economically speaking, be much more efficient.

The economic conditions under which we made use of the Fund’s resources in the 1960s and the middle 1970s are far different from the conditions under which we need them now. The disequilibrium we are faced with did not arise primarily from demand distortions, let alone from the increasing use of real resources, but from the recent damage done to domestic supply mechanisms. This damage has been compounded by several international factors that have reduced the availability of external resources just when the need for them is most pressing. Domestically, we are in a critical supply situation; externally, the crisis is one of liquidity. Both crises are likely to persist for a long time.

This brings me to our expectations of the role the Fund should play and our actual experiences with, and current perceptions of, the performance of the Fund. We all know that the Fund is the institution par excellence for providing relief to members in an external liquidity crisis. We also know that the Fund’s resources for doing so are not unlimited and accept that, in making them available, the Fund has to design conditions to ensure that the resources will have maximum effectiveness in mitigating the crisis, not only in the immediate context but also over a medium term, and that the use of these resources by a member will have to be temporary so as to preserve their revolving character. After all, as central bankers we adopt similar attitudes toward our own borrowers. So far so good. But when these general principles get translated into specific programs for action, there seems to be a wide gulf between the Fund’s and the Africans’ diagnosis of the true cause of the malaise, the prescriptions of remedies, the perceptions of how the remedies will work in practice, and the periods within which a more healthy and normal condition will return.

Thus there is a general feeling among us that the Fund gives excessive importance to achieving internal monetary balance and exchange rate adjustment, irrespective of the causes of the present disequilibria in payments. It is unclear whether this is due to the particular set of assumptions the Fund has made about the way in which the disequilibria are produced—what in technical jargon is called “the model”—or whether it is due to the Fund’s feeling that it can usefully work only in these areas.

One problem I would wish the Fund to consider is that monetary policy is rather less effective in African countries than it may be in relatively developed countries. (Even there its role is in dispute.) First, there is greater liquidity outside the banking system in African countries. Further, monetary policy is bound to be less successful in a developing African economy with its narrow and ill-connected money markets, structural rigidities, and nonmonetary obstacles to growth. In this context, the limitations on influencing macroeconomic activity, let alone fostering development, merely by acting on the money supply are particularly great and cannot be ignored. Another constraint for the central bankers of Africa is the problem of monetary data. “Errors and omissions” attain large dimensions in the measurement of monetary aggregates in the absence in most commercial banks of statistical and research cells and in the lack of mechanized collection and compilation of essential data. Sophisticated monetary policies cannot be evolved and implemented under such circumstances. In short, central banks in African countries are highly exposed to uncertain influences and forces emanating from the undeveloped economic environment.

Central banking in less developed economies, as in Africa, is further conditioned by the need on the part of the banks to assume a more positive role in development. Although the precise nature of this role varies from country to country, in addition to their usual responsibilities central banks are often charged with operational responsibilities in regard to programs of economic development. (In developed economies this work is left either to private sector or to special public-sector institutions operating in the capital market.) This development-banking role of central banks in our economies implies some restrictions on the free use of monetary-policy instruments, such as the allocation of credit and setting of interest rates. A great deal more can be said to elaborate and illustrate this proposition, but I think the point is obvious. In the special conditions obtaining in African countries, for the reasons explained, the sharp edges of the instruments of monetary policy get blunted.

In pointing out the especially restrictive conditions in which African central bankers must work, I certainly do not intend to undermine the role of central banks. Nor is it my intention to suggest that the external balance and the level of the exchange rate are unimportant. No responsible central banker would do that. But, and this is the crux of the matter, there seems to be a wide divergence of view between the Fund and ourselves as to the appropriate exchange rate and other levels, how to reach them, and their likely effects. The matter is complicated by differing perceptions of how particular economies are actually structured, how they will react to particular measures, how long the interval will be between taking a particular step and its becoming fully effective (the speed of adjustment), and how changes build up selfreversing factors (e.g., inflation) before they can increase real exports, savings, and recurrent revenues. Our economies are mostly fragmented, the poorer ones being more highly fragmented than the rest. Income and asset distributions are skewed, and the speed of adjustment is quite slow. We are therefore understandably hesitant about the efficacy of the Fund’s prescriptions, especially when there are quite legitimate and serious doubts, even at technical and factual levels, about the benefits which much better articulated and richer economies than ours have derived from the kind of policies we are often called upon to implement. We feel that much more thought than ever before needs to be given at technical levels in the Fund to these questions.

The correct assessment of the prevailing situation and understanding of how a particular economy works in practice have assumed much greater importance than was the case, say, 10 to 15 years ago. Not only are the present balance of payments problems of African countries of wider dimensions and more intractable than before, but the Fund’s viewpoint on the creditworthiness of a country or soundness of its policies has acquired much greater importance than in the past. Whether it is a question of rescheduling commercial-bank debt or official loans or of granting further bank loans or more official assistance, concerned authorities place great reliance on the Fund’s conclusions. That the Fund’s own resources are not adequate to the magnitude of the problem places great responsibility on the Fund. If its judgment is inaccurate, the recipient country or the donor organization will suffer. All the more reason therefore that the Fund should take every care to arrive at a judgment well substantiated by a thorough study of the facts and, in particular, of the path and speed of adjustment to the suggested policy measures. I am sure all of us will be happy to assist the Fund in such endeavors.

In the present difficult circumstances, our African economies are in most cases too import intensive and insufficiently export intensive. Therefore efficient import substitution and efficient export promotion are not alternatives, but necessary complements, if we are ever to regain external balance. This is particularly true of industry that must play an important part in restructuring Africa.

About 60–70 percent of our agricultural exports are of products for which—given their price elasticities, rates of demand growth, and Africa’s share of world trade—rapid growth in export volume would reduce export earnings throughout Africa. At the same time, the demand for minerals is problematic at best and even the prospect for petroleum is none too bright to the end of the decade.

Three ways to enhance export earnings, however, lie in industrialization. The first is processing existing primary exports. Not all are suitable for processing, but many are. India, for example, no longer exports raw hides and foresees the day when it will no longer export leather, but only leather products. Tanning and the manufacture of leather products involve high value added and are not, in world terms, very technical nor capital intensive. That is one example. Another is specialty textiles, such as African prints and garments made from them. A second way is developing new manufacturing units based on natural resources and exporting finished or semifinished manufactures, such as, for example, pulp and paper from softwoods and ammonia and urea from natural gas. A third way—which straddles the border between export promotion and import substitution—is regionally oriented manufacturing. This is by no means as cost-inefficient across the board as is sometimes assumed. Tanzania’s electrical-transmission and switchgear factory has won several aid-financed orders in international tendering; so has Zimbabwe’s railway-vehicles industry. Malawi, Botswana, and Zimbabwe have substantial manufactured exports that receive little protection against world sources and next to none against South African products. I am sure many of my colleagues could quote similar examples. Viewed regionally, collective import substitution is, in some cases, both more practicable and more cost efficient than purely national import substitution. Viewed nationally, it is export promotion. So long as we can buy imports from each other in return for exports to each other (in unusual cases the purchaser can readily pay in convertible currency despite highly unbalanced trade), exports to our neighbors are every bit as valuable as those to our traditional northern markets, and, for manufactures, often pose fewer taste, marketing, and transport-cost barriers.

On the domestic side, efficient import substitution in manufactures as well as food and energy is critical. We need to increase both domestic output and domestic employment, as well as to reduce the marginal import to gross domestic product ratio. Clearly not all industries are suitable. For example, unsuitable are those with high direct and indirect recurrent import content or those producing and using technology designed for much larger markets and plant sizes than we can provide (although regional exporting may help reduce this scale barrier). But the sweeping characterization of all African industry as involving high import content, low domestic value added (including domestic purchases of goods and services), and hopelessly high cost is simply not empirically correct.

On protection there is a problem. In the 1960s three countries were commonly characterized as having developed intolerably high costs and globally uncompetitive industrial sectors behind high protection barriers. Analysts confidently explained why they would forever remain sickly infants. Those three countries are South Korea, Singapore, and Brazil. Especially in South Korea and Brazil protectionism is alive and well, but after 20 to 40 years of building a strong industrial sector oriented to the home market, global market competitiveness of these countries across a wide range of manufactures has been demonstrated. One hundred years earlier, similar analyses of the U.S. and German manufacturing sectors “demonstrated” that protection would forever prevent their becoming globally competitive. There is I know, a catch. Building a home or regional market base is, historically the commonest means to building a strong industrial sector that can serve as a springboard to global market penetration. But building this market base is not a sufficient condition to becoming globally competitive—many infant industries and industrial sectors do become eternal juvenile delinquents, rather than healthy adults. Moreover, it is not the only route to competitiveness, nor for very small economies, such as Botswana and Mauritius, is it likely to be practicable.

In the perspective of medium-term structural adjustment as well as longterm development, industrialization is critical. The Lagos Plan of Action was right to pick out basic food self-sufficiency and industrialization as the focus of attention until the year 2000. The Southern African Development Coordination Conference is correct to emphasize building up, step by step (beginning with selected agricultural inputs, basic consumer goods, and construction inputs), a coordinated regional approach to industrialization.

In the short run, different but no less urgent considerations apply. Unless peasants can buy basic manufactured consumer goods and construction materials (rather grandly termed “incentive goods”) no producer price increases can be real to them. Unless inputs—hoes, seeds, fertilizers, gunny bags, plows—are more readily available, they will find it well nigh impossible to achieve sustained output increases. Unless and until these conditions are met, massive increases in nominal producer prices (whether official, private, or parallel market) are not engines to increase production so much as dynamos for reving up inflation and currency overvaluation.

Today many African countries have the capacity to produce these incentive goods and inputs. In their production, the ratio of imports (of operating inputs and spares) to output often averages 20–25 percent. That is, local production is far more foreign-exchange efficient than final goods imports. Yet these industries stand 25–75 percent idle because we cannot afford that 20–25 percent import content. Frankly, I believe that one of the necessary preconditions for reversing the 1970–85 secular decline in agricultural output per capita in Africa is to revive our manufacturing, so that peasants can actually buy the inputs they need and the consumption and construction goods they want. Without that, better nominal prices, better private and public procurement policies and enterprises, more research, even improved processing and transport capacity will not result in the sustained 4 percent or better annual agricultural growth trend we need. I will go further. Without it, many African nations will never get back to past peak agricultural output levels and will continue on a downward trend punctuated by short-lived, partial recoveries, when—as this year in most of East and Southern Africa (but not in the Horn, or Sudan, or the Sahel)—the weather is kind to us. It is, I believe, no accident that the bulk of the World Bank’s first program loan to Mozambique is allocated to inputs and spares for basic consumer goods and for industries producing agricultural inputs. I salute that judgment by Mozambique and the Bank not because it downgrades Mozambique’s agricultural crisis, but, on the contrary, because it is a critical step toward making possible the recovery of Mozambique’s agricultural production and rural economy.

I should like at this point to make a couple of observations on the low-income countries that form the majority on our continent. Their plight is particularly difficult because, apart from the severity of external shocks and the rigidity of their export sectors, many are very much restricted to the Fund as the only source for balance of payments assistance—a lender of first, last, and only resort. Nevertheless, there seems little recognition of this reality in Fund policies relating to the amount and duration of its assistance. The innovations the Fund resorted to in the 1970s to meet the problems created by external shocks, such as the oil facilities, the Trust Fund, and the interest subsidy, are seen no more. This is ironic since the ability of low-income countries to service high-interest, short-term drawings is now lower than it was then. Moreover, the 1973–74 economic shocks were certainly not comparable in duration and cumulative impact to those beginning in 1979. Even the question of further SDR allocations has been hanging fire for several years. Many of these countries are forced to do without Fund assistance because they are already in the “high conditionality” status, and, for one reason or another, are unable to satisfy the conditions. Satisfying these conditions would only move them to still higher conditionality status without any assurance that the Fund, by itself or in consort with others, would provide adequate resources to enable them to achieve a satisfactory external position within a reasonable period.

For major debtors using basically commercial bank funding, the Fund has not merely encouraged parallel negotiations between commercial banks and these countries, leading to rescheduling and new money, but has insisted on such negotiations and on lenders releasing enough funds to ensure the success of stabilization programs. Those nations whose chief sources of external finance are governments (including their export credit windows) and international development agencies wonder why the Fund has not made equally forceful efforts on their behalf to mobilize from these sources the complementary finance needed, in parallel with Fund drawings, for any Fund stabilization program in Africa to succeed or even to endure beyond the first few quarterly checks.

Mr. Ruding, the current Chairman of the Interim Committee, recently warned that insufficient financing leads to too large a depreciation of exchange rates, too tight restrictions on imports and other payments, and ultimately to defaults. He also indicated that some African stabilization programs are so austere as to give little incentive or room for increased investment, economic growth, or employment. Those two comments relate directly to the context in which we are forced to operate.

We are passing through a critical phase in the history of our relations with the Fund. Our balance of payments situation will take time to set itself right. In the meantime, if the present policies of the Fund continue, most of us will be forced to repay large amounts of previously contracted Fund debt, as indeed some of us are already doing. In other words, instead of being of assistance in an already grave situation, it is likely that the Fund will become an instrument of its aggravation! I am sure no one, including the management and staff at the Fund, wants that to happen. It is therefore of the greatest importance that the Fund and African central bankers sit together to discuss all aspects of our relations, practical as well as theoretical, in an atmosphere free from the tensions of negotiations that generally obtain during our bilateral discussions with the Fund, so as to arrive at a better understanding of mutual problems and to help in the evolution of ways and means of responding to Africa’s external liquidity crisis.

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