Chapter

The Economic Crisis in Africa

Editor(s):
Gerald Helleiner
Published Date:
March 1986
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Author(s)
Philip Ndegwa

Author’s Note: The author would like to thank A.K. Mullei and A.C. Fenwick for their assistance in preparing the final draft of this paper. The views expressed in this paper do not necessarily reflect those of the Central Bank of Kenya or the Government of the Republic of Kenya.

Africa is currently in a dangerous economic crisis, whose real severity, dimensions, and social and political consequences are not fully appreciated even in Africa itself. The causes of this worsening crisis include a wide range of internal weaknesses, a hostile external economic environment, and, in recent years, climatic factors. The African crisis is also unique in that many of its elements are uncharacteristic of other developing regions.

It is essential that the nature of this crisis be clearly understood by African governments, the multilateral organizations, and donor countries. Without that understanding, communication is impossible, nor is it possible to design economic measures and assistance programs to attack the crisis effectively and consistently.

Indeed, valuable time may continue to be lost in trying to sort out misunderstandings. Africa’s economic situation, already serious, is deteriorating. In fact unless effective measures are taken now, the already fragile fabric of the economic, social, and political systems in many parts of Africa will break down. The starting point for discussions between the International Monetary Fund and the World Bank, on the one hand, and African central banks, on the other, should be a fresh examination of this crisis. The African situation should first be looked at objectively, and then strategies appropriate for dealing with it should be considered. This sounds simple, but it will require determination by all parties to consider new approaches to the problems. In this connection, there appears happily to be no disagreement about the overall objective. Every African country is seeking balanced and sustainable economic growth, the same objective which the Fund and the World Bank wish to support. Disagreements continue to take place over strategies, such as policies needed, appropriate economic measures, and their timing. To overcome misunderstanding, the crisis facing Africa and its principal causes must first be understood. After that, since there is no disagreement about the basic objective, it is easier to discuss strategies appropriate for dealing with the crisis. In short, the first task is diagnosis, and only then should medicine be prescribed. To deal with the situation the other way around is to invite even more misunderstanding and disagreement.

The African Situation

The World Bank and other organizations have published materials on some aspects of the crisis and the complex range of issues resulting from it: mass poverty, unsustainable population growth rates, havoc wreaked by drought, the rapidly decreasing ability of the continent to feed itself, unemployment, shortage of domestic savings, accelerating desertification, and shortcomings in domestic policies. Two observations are in order. First, for many African countries poverty and other hardships are more severe now than 20 years ago. In other words, in certain respects, such as per capita incomes and employment, the two United Nations Development Decades have seen virtually no development in many parts of Africa. Second, the interaction between rapidly increasing populations, shortage of resources and skills, and weak or ineffective administrative machineries will in many cases lead to greater human misery and to total collapse of many African countries unless appropriate measures are taken immediately. While appropriate internal measures by Africans themselves are necessary, many of these countries’ economies are often substantially influenced by forces beyond their control. Climatic conditions are one such factor, but external trade (e.g., commodity prices) and other factors are of equal importance and capable of management, given willingness at the international level. Ten primary products account for 75 percent of Africa’s export earnings, making Africa’s export earnings extremely vulnerable to changes in demand.

Africa’s access to alternative sources of foreign exchange, especially the private loan markets, is circumscribed by its special circumstances. Africa gets only 10 percent of total foreign private investment flowing to developing countries, compared with 60 percent to Latin America and 30 percent to Asia.

The steep rises in oil prices in the last 12 years and the recent global recession have considerably inhibited African countries to handle their economic problems. For example, between 1979 and 1984, growth in output of African countries averaged only 2 percent a year.1 That was much slower than population growth, which averaged nearly 3 percent and reached a high of 4 percent in several countries. The growth of export volumes has averaged 2.8 percent for Africa, compared with 6.5 percent for all non-oil developing countries as a group. Import volumes have fallen on average by 1.1 percent, compared with growth of 2.9 percent for all non-oil developing countries. At the same time, food production per capita has fallen by about 20 percent during the last two decades. Imports of grain on commercial terms have grown by about 9 percent a year on average over that period.

The terms of trade of African countries have been weak, suffering an average decline of 2 percent in the last six years. The current account deficits of African countries have been little reduced over the last few years (to a total of $10 billion in 1984, compared with a peak of $14 billion in 1981), but the improvement is largely attributable to the curtailment of imports essential for development. The smaller deficit is not therefore something to be applauded. External indebtedness (excluding outstanding Fund purchases) has risen to over 60 percent of gross domestic product, compared with around 35 percent in the late 1970s, while debt service ratios have risen to around 25 percent.

The outlook for Africa is likewise unfavorable. The Fund’s most recent set of scenarios, based on assumptions which I consider optimistic, indicate that many aspects of economic performance of 43 low income countries (26 of which are African) are unlikely to improve, and some aspects will worsen. The picture, of course, becomes worse on less optimistic assumptions.

In summary, the causes of the economic crisis in Africa reflect a difficult combination of internal weakness, unfavorable external economic conditions, and noneconomic factors, such as adverse weather. The crisis calls for a coordinated approach, focused broadly on development rather than on economic stabilization. African governments, the donor countries, and the multilateral institutions must now embark on a dialogue on development possibilities to be tackled not tomorrow, but now. Time is running out. If insufficient effort is made in the 1980s, it may be beyond joint abilities of the Africans and their well-wishers to handle the problems in the 1990s.

Solutions

As stressed above, the task of dealing with the African crisis is too large and urgent for anything less than a sustained effort by all parties on all fronts. The solutions must focus on internal measures in individual countries, regional cooperation, and bilateral and multilateral assistance. Progress will be insufficient unless material steps are taken in each of these areas.

A considerable amount of literature, prepared by such bodies as the World Bank, already exists on how African countries can themselves improve their economic performance. There can be little disagreement on the value of the intellectual and practical contributions made by that literature on agricultural policy, population planning, improvements in administration, and abandonment of practices that inhibit personal productive effort. African countries must take the necessary measures in these areas. In particular, there must be a determination to implement those macroeconomic policies (e.g., monetary and exchange-rate policies) demanded by changing circumstances, so that economic imbalances, endemic in many African countries, can be arrested before they reach proportions at which surgical operations are unavoidable. It is equally important to deal urgently with those internal bottlenecks that threaten to hinder production, such as inappropriate pricing systems, administrative and regulatory constraints that thwart the efficient operation of markets, inadequate support of popular efforts, overreliance on government investments, and inappropriate import and tariff policies.

Economic cooperation needs the urgent attention of African countries. This cooperation is absolutely essential in food production and industrialization. Cooperation should not be regarded, as hitherto, as something to be mentioned in meetings in order to appear neighborly.2 Economic cooperation is necessary for the development and survival of each and every African country. In the past the highest barrier to economic cooperation has been political resistance because of ideological differences, disputes about sharing the expected benefits from cooperation, narrow and short-run political ambitions. African political leaders must recognize that there will be no rapid and sustainable development in their countries without cooperation. In this they must demonstrate their complete commitment if only because without that commitment other benefits, especially those expected from donors, will not materialize.

The African crisis needs, in addition to more practical and committed action by the African countries themselves, appropriate external support if the strong forces now leading to greater poverty are to be overcome before it is too late. In that connection, bilateral and multilateral donors must recognize that the unique economic crisis confronting Africa requires alternative development strategies which, in turn, require alternative external-support programs.

Proposals for an enlargement of the resources available to (and from) the Fund and the World Bank, for a new SDR allocation, and for ways to reduce indebtedness by cancellation or conversion to grants have much logic and necessity to support them. Other useful proposals include bringing about a substantial reduction in protectionism in the industrialized countries and applying Fund surveillance with equal force to creditor countries in a position to increase incomes in their own and in other countries by increasing imports.

There is, of course, nothing new about these proposals, important though they are, and most of them have a somewhat dated air, with the result that they are now often dismissed out of hand. Yet the need to implement them is overwhelming. The recent and present inaction contrasts starkly with the spirit of innovation and international cooperation of the early 1970s, when several steps were taken, within the Fund’s framework in particular, to deal with the needs of that time. The oil facilities were created then, interest subsidy accounts were set up, the Trust Fund was established, the compensatory financing facility was extended, and the extended Fund facility instituted. Many of these, however, were temporary steps.

A renewal of this spirit is now required to deal with the crisis of the 1980s. As far as Africa is concerned, efforts such as the World Bank’s special action program for Africa are clearly along the right lines, and there is no doubt that emergency programs to deal with certain aspects of the African crisis, especially famine, are necessary. In that connection perhaps a portion of the Fund’s gold holdings could be used to fight famine, as indeed some of those assets were used in the 1970s. But these emergency efforts must not obscure the urgent and imperative need for long-term measures. Those measures are not necessary only for Africa: they are needed for all developing regions and the international community as a whole. A new approach to the management of international interdependence, based on equity and realization that prosperity everywhere is augmented and sustained by fighting poverty wherever it might be found, is now imperative.

Seen in this context and in that of the preceding discussion about the African economic crisis, African countries often find some aspects of Fund conditionality difficult to accept. Short-term “adjustment” programs in countries that already have very low and declining per capita income and in which unemployment is high and basic daily food requirements expensive in relation to incomes can have economic and political implications that are difficult to foresee and certainly not easy to handle. Steps to reduce economic activity already at minimum levels are not the answer in these cases, over and above the intellectual difficulty of justifying such measures. Unsustainable balance of payments deficits and other economic imbalances must, of course, be corrected but this should only be contemplated in a realistic framework of growth. The longer-term Fund and World Bank facilities (the extended Fund facility and structural adjustment loans) are in principle the kinds of efforts appropriate in this regard. A greater proportion of the lending activities of these bodies should be effected through these kinds of programs.

The Fund and the World Bank have crucial roles to play in the development of Africa through such measures. It should also be emphasized that this is not just a question of the amount of funding available. It is equally important that these organizations participate fully and appropriately with developing countries at the earliest stages in formulating development plans and strategies. As already mentioned, the job at hand requires open minds and alternative strategies. Working closely together in formulating such strategies should also help improve mutual understanding of the various perspectives on development that exist on each side of the Atlantic. The extended Fund facility and structural adjustment loans are essentially learning processes and not mechanisms to force standard prescriptions. In any case, it should not be the attitude that “produce a good program and you will get a loan from the Fund or Bank.” These institutions should be prepared to participate actively in the formulation of the program, especially when the country concerned may be unable to produce a working document on its own.

Conclusion

The African situation calls for a definite, objective, and large commitment. But this commitment will not occur unless there is a more open and constructive dialogue between Africa and the international community. To be constructive, that dialogue must recognize the problem in its most basic human terms.

Finally, I would like to invite consideration of ways to facilitate communication. A new office in Africa, perhaps sponsored by the Fund and the World Bank and responsible for ensuring that perspectives on each side are adequately represented, might help in this regard. I know that there are such organizations as the Economic Commission for Africa and offices of a number of specialized agencies and the World Bank in Africa, but in my view more than that is needed. Hence my suggestion for a special Fund/World Bank office in Africa.

Many of the figures in this and the following paragraphs are taken from World Economic Outlook (Washington: International Monetary Fund, 1984).

I have discussed this matter in some depth in Africa’s Development Crisis (Nairobi: Heinemann, 1985) and in greater detail in “Cooperation Among Sub-Saharan African Countries: An Engine of Growth?” Journal of Development Planning (New York), No. 15 (1985), pp. 137–61.

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