Chapter

African Economic Disequilibria and the International Monetary System

Editor(s):
Gerald Helleiner
Published Date:
March 1986
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Author(s)
J.O. Sanusi

Developing African countries are currently in the grip of an economic and social crisis of an unprecedented scale and severity that threatens the existence of many of these countries. To be sure, the crisis did not suddenly emerge. It is the cumulation of adverse developments whose smoldering embers are traceable back to the 1970s. Its tempo has recently so accelerated that unless urgent measures are taken, the situation spells disaster. Several interrelated factors have combined to create the economic crisis. In addition to structural rigidities, developing African countries are also the victims of unfavorable exogenous shocks that have kept them in a perpetual state of disequilibrium.

This paper will not rehash the economic malaise affecting the developing African countries. Documents on the subject are abundant. Rather, it will analyze the nature and causes of disequilibria in Africa and how the international monetary system has responded to the crisis. The leitmotiv of the paper is that, in relation to the magnitude and severity of the economic crisis, the response of the various international financial institutions, as well as private capital markets (which constitute the international monetary and financial system), has been inadequate.

For the purpose of this paper, the concept of “disequilibrium” is loosely employed. The concept is akin to, but in a singular way departs from, its now familiar neoclassical meaning because this paper is essentially an exercise in political economy. The concept here simply refers to the constellation of destabilizing forces that have operated on one another so as to keep the African economies in a state of external and internal imbalance (crisis).

The first section of this paper analyzes the nature and causes of the economic disequilibria in Africa. The second section examines the response of the international monetary and financial system to the crisis, particularly how the modus operandi of the international monetary system affects the access of the developing African countries to financial resources and why the African countries have benefited so marginally from the system. Finally, the third section draws together some of the major measures, short, medium, and long term, needed to stem the crisis, allow for adjustment consistent with the capability of the countries, and set the African economies on a self-sustained and dynamic growth path.

Nature and Causes of the Disequilibria

Internal structural rigidity and acts of nature have been aggravated by deterioration in the international economic environment. These factors have been responsible for generating the constellation of problems that constitute the present economic and social crisis in Africa.

Of the countries classified by the United Nations as “the least developed,” two thirds are in Africa. As compared with other developing countries, social and economic indicators of development, such as output growth, health, and literacy, have shown persistently weak performance in Africa. Economic growth rates in Africa in the 1970s averaged only 4–5 percent as compared with the 6–7 percent recorded by Latin America. Average per capita GNP in 1981 was $770, as compared with $973 for Asia, and $2044 for Latin America. Food production in Africa between 1970 and 1980 was much lower than in the other regions and rose by an average of only 1.7 percent as compared with 2.3 percent for Asia, and 3.5 percent for Latin America.

The rate of growth of population in Africa is among the highest in the world. This trend has put pressure on land where average per hectare production has been lagging behind other developing regions. Furthermore, population growth increases the need for additional social services and puts further pressure on government expenditure. In terms of the physical quality of life, Africa has the lowest index of all developing country groups, as well as the highest infant mortality rate and the lowest average literacy rate (36 percent). The vast majority of the people in Africa are living in abject poverty and social deprivation.

The economic structure in Africa is usually dualistic with a large subsistence sector (accounting in some cases for over 70 percent of the gross domestic product) and a relatively small monetized modern sector frequently dominated by mining and other extractive industries operated by multinational corporations. The production structure in the monetized sector is typically export oriented and consists of a narrow range of primary products—mainly from agriculture and mining.

The development of African economies has been constrained by their primary export-oriented economic structure that has been historically determined and that, after more than two decades of independence, remains virtually unchanged. In addition, as open economies, African countries are more prone to the vagaries of international economic events.

Since the early 1970s, the terms of trade of the region have deteriorated sharply because of asymmetrical movements in the prices of imports and exports. While the African countries have been beset with enormous increases in the prices of their imports (e.g., oil, intermediate and capital goods, and food), the prices of their exports (especially coffee, cocoa, and tea) have declined significantly.

With deficits in current accounts and the worsening terms of trade, developing African countries have become mired in the debt trap. Total external debts of the region account for only about 18.7 percent of total developing countries’ debt. This figure, however, conceals the fact that as a ratio of their GNP, total external debts are higher than in any other region of the world. Developing African countries’ outstanding external debt, both disbursed and undisbursed, was put at about $150 billion at the end of 1983, as compared with $143 billion at the end of 1982. As a proportion of the value of their annual exports, the external debt of the region rose from 138 percent in 1981 to 161 percent in 1982 and is estimated to be about 180 percent in 1983.

A number of African countries are by nature disadvantaged since they are landlocked or located in an arid zone that imposes physical constraints on development efforts. In addition to physical structural limitations, many of these countries are also prone to drought, earthquakes, floods, desertification, deforestation, and crop and animal diseases. The severity and scale of these devastating natural factors in Africa are greater than in the other regions of the world.

By far the single most devastating plague on African countries is the drought, which has been persistent and severe and is rapidly spreading to hitherto unaffected areas. In addition, desertification is said to be spreading at a pace that spells disaster for the continent if it is not checked. It is estimated that 44 percent of the land in Africa has been affected by drought and desertification, which together have reduced agricultural production by more than one half. The United Nations Disaster Relief Coordinator’s Office reported that between 1970 and 1981, because of natural disasters, over 1 million people in Africa lost their lives, while material damages were put conservatively at $46 million. In addition to the loss of human life, outbreaks of disease and pest infestation also took their tolls on crops and livestock on a large scale in various parts of the continent.

Moreover, rapid population growth rates have put pressure on arable land, thus forcing marginal lands to be brought into cultivation, which in turn has drastically reduced agricultural output, incomes, and employment and has accentuated domestic inflation. To these problems are added the prevalence of subsistence production, which renders Africa’s food supply prone to adverse weather conditions, disease, and pests. The situation has been further exacerbated by the “international demonstration effect” that shifts tastes away from traditional African staples in favor of imported foods. (This is especially true for manufactured food products.) These influences have led to a sharp rise in the total food import bill for the region and a worsening of the external payments position. A growing dependence on imported foods has reduced the possibility of using trade, specifically imports, for economic growth and development.

These factors, along with internal structural rigidity, have militated against economic progress in the developing African countries. Inappropriate and imprudent economic policies have also accentuated the economic difficulties facing some of these countries. In particular, many countries have adopted domestic and external policies, as well as institutional arrangements, such as unprofitable parastatals and costly commodity marketing boards, that have compounded the problems of adjustment. Official policies have in some cases failed to accord priority to food production by providing advantageous pricing, incentives, and investment.

The external causes of the disequilibria in Africa can be attributed to the deterioration in terms of trade, exchange rate volatility, external indebtedness, high interest rates, and protectionism.

On a general plane, and in varying degrees, all developing countries have suffered from adverse external developments in the late 1970s and early 1980s. Nevertheless, the impact of external shocks on the developing African countries has been more severe because of the weak base of their economies, the greater weight of primary products in their exports, and a series of natural disasters.

External economic disequilibria are a manifestation of the dependence of developing countries on industrial countries and their susceptibility to external shocks. African exports depend on the production of primary products (from agriculture and mining). The supply of these products is inelastic in the short run and prone to a capricious international economy. African countries are price-takers rather than price-makers with respect to their exports. Moreover, imports into African developing countries consist largely of intermediate and capital goods, whose prices these countries are unable to influence. As African terms of trade declined by 3 percent in 1970–75 and fell by a further 5 percent in 1976–81, current account deficits rose dramatically from $437 million in 1970 to over $20 billion in 1982.

In the efficient and effective functioning of the international monetary system, both surpluses and deficits can be equally destabilizing. Adjustment, to be equitable, must therefore be symmetrical between deficit and surplus countries. The present asymmetry in the international adjustment process, however, implies that the burden of adjustment in terms of forgone output, unemployment, and inflation, tends to be borne largely by deficit countries. In the developing countries, this situation has severely constrained their growth. In some cases, the adjustment in African countries has taken the form of large cutbacks in imports of capital goods, spare parts, and raw materials, reduction in social services, and massive retrenchment of workers, particularly in countries with limited opportunities for alternative employment. The social and economic costs of these measures could be politically destabilizing.

With economic activity slackening largely because of deflationary measures in the industrial countries, the prices for developing African countries’ exports have fallen sharply in real terms. Furthermore, volatility and misalignment in the exchange rates of the major currencies, particularly the appreciation of the dollar, have destabilized the trade position of the African countries and deepened their external payments problems. The attempt to ride out unexpected massive external deficits by maintaining a critical minimum level of imports has compelled African countries to run down their external reserves to precarious levels and to have recourse to external borrowing. Only four African countries had sufficient reserves to finance three months’ imports in 1982. Between 1971 and 1983, the external debt of Africa is estimated to have increased from $11 billion to $150 billion (disbursed and undisbursed).

Economic policies in the industrial countries have also resulted in higher nominal and real interest rates. Record interest rates have in turn increased the cost of servicing external debts for the African countries. Total debt service payments by developing African countries rose steeply from $1.4 billion in 1972 to $15.3 billion in 1982. The high rate of increase in debt-service payments accounts for the sharp decline in net resource inflows, which reached a peak of $10.1 billion in 1978 and thereafter fell every year, turning to a net outflow of resources totalling $0.3 billion in 1982.

Furthermore, a surge in protectionism in the developed countries, manifested in a marked increase in tariff and nontariff barriers, has resulted in a substantial reduction in the exports of the developing countries to the industrial countries.

In sum, this constellation of mutually reinforcing problems has resulted in deterioration in African countries’ terms of trade and external payments position and has increased debt-service commitments, causing in turn a vicious circle of low income, savings, investment, and output.

Response of the International Monetary System

The preceding section focused attention on the nature, causes, and consequences of the crisis. Although some of the economic problems facing developing African countries are internal, demanding internal solutions, it is clear that these problems are for the most part exogenously determined and that the overall solutions are therefore beyond the capability of these countries alone. Surely the African countries are aware of the magnitude of the problems facing them and have accordingly undertaken bold and often painful adjustment measures to address the situation. These measures include policies aimed at pruning non-core programs, holding down already low wages, improving revenue positions, and compressing imports (including essential capital goods, as well as food). All these measures put enormous strain on social and political stability.

Moreover, at the regional level the African countries recognize intraregional economic cooperation, as envisaged in the Lagos Plan of Action and the Monrovia Strategy, as a means of promoting collective economic self-reliance. Noticeable progress has been made in the Economic Community of West African States, for example, but efforts in this direction are being seriously constrained by the economic crisis facing all African nations.

What has been the response of the international monetary system to the crisis? How much financial assistance have the developing African countries received from the system?

For the purpose of this essay, the international monetary system refers to the international monetary and financial institutions, overseas development assistance (bilateral and multilateral), and private capital markets. In this context, it encompasses the Bretton Woods system, other multilateral institutions such as the Organization for Economic Cooperation and Development (OECD) and the Organization of Petroleum Exporting Countries (OPEC), the Euromarkets, and private foreign investment.

The deterioration in the economic conditions in Africa during the late 1970s was met with an increase in the International Monetary Fund’s activities in the region. Like other developing regions in the world, Africa made significant use of Fund resources including its compensatory financing facility and extended Fund facility. But, as in other regions, these resources fell far short of African needs.

From 1979 to 1983, purchases by developing African countries from the Fund amounted to SDR 5,152 million, or 22 percent of total Fund lending, as compared with SDR 8,096 million, or 35 percent, for Asia and SDR 9,805 million, or 43 percent, for Latin America.

As of June 30, 1984, the cumulative flow of resources to Africa under the compensatory financing facility totaled SDR 2,121 million, representing about 28 percent of cumulative flows to the developing countries, as compared with SDR 3,005 million, or over 40 percent, that went to Latin America. African countries made only negligible use of the buffer stock financing facility—a mere SDR 8.6 million, as compared with SDR 281 million for Asia and SDR 139 million for Latin America.

As of May 1984, the cumulative flow of Fund resources under the extended Fund facility to all developing countries amounted to SDR 5,906 million, of which Asia received SDR 2,946 million, or nearly 50 percent, closely followed by Latin America with SDR 2,296 million, or about 39 percent. Developing African countries received SDR 613 million, or about 10 percent. On a cumulative basis, as of May 1984, Fund assistance to African countries under the supplementary financing facility totaled SDR 586 million, representing 21 percent of aggregate supplementary financing resources, while SDR 1,847 million, or 69.5 percent of total assistance, went to Asia.

By the time the oil facilities were wound up in March 1976, of the 53 countries which benefited from the scheme, six industrial countries accounted for about 51 percent of total drawings, as compared with 7 percent for Africa.

The record of the World Bank’s distribution of resources clearly shows that despite the unprecedented economic crisis that has ravaged the continent recently, Africa has up until now received an inadequate flow of funds from the Bank. The cumulative flow of World Bank resources to African countries amounted to $10 billion in 1982, representing 18.6 percent of Bank aggregate resource transfers. (Asia received $20 billion, or 36 percent, and Latin America over $17 billion, or 32 percent.)

Cumulative IDA credits totaled about $20 billion in 1982. Of this, Africa’s share amounted to $5.9 billion, or 29.5 percent, compared with $13.6 billion, or 68 percent, for Asia.

Until the late 1970s, for most countries of Africa, overseas development assistance loomed large in the total package of external resource flows, accounting on the average, for about 50 percent of their external resource flows in the 1960s. The magnitude and composition of aid flows changed markedly, however, in the late 1970s, a period that witnessed increased privatization. From 1980 onward, such assistance to Africa actually fell in nominal terms from 53 percent in 1971–73 to 38 percent in 1979–81, while private flows rose from 10.9 percent in 1971–73 to 59.4 percent in 1979–81.

With the relative decline in overseas development assistance, the developing countries were compelled to turn to the international money and capital markets for funds. This development had the effect of putting pressure on the markets as competition for syndicated Euroloans increased. Terms hardened, and for the African countries with their special circumstances, borrowing from the markets became extremely difficult. Africa’s resort to Euroloans rose from $1 billion in 1974 to $5 billion in 1978, but declined thereafter to $3 billion in 1981, compared with $3 billion, $12 billion, and $13 billion for Asia in the same period. For Latin America, the respective figures were $5 billion, $20 billion, and $27 billion.

OPEC has played an increasingly significant role in the provision of aid to developing countries since the mid-1970s.

In absolute terms, OPEC lags behind the traditional aid donors, notably the Development Assistance Committee (DAC) members. Nevertheless, in relative terms, OPEC aid compares favorably with that of DAC countries. As a ratio of GNP, the average OPEC figure of 1.87 percent from 1975 through 1982 is five times as high as the DAC average of 0.36 percent, which is far below the internationally recommended target of 0.70 percent.

As of December 31, 1983, OPEC’s cumulative aid to the developing countries totaled $1.8 billion. Of this, Africa’s share amounted to $810 million, or 45 percent, compared with $803 million, or 44 percent for Asia, and $198 million, or 11 percent for Latin America. Clearly, OPEC has played an important role in filling the resource gaps in developing countries.

Why have the developing African countries not benefited more from the international monetary system? The paucity of the flow of resources from the system to the developing African countries, as highlighted in the preceding subsection, may be ascribed to the operational philosophy of the financial institutions in the system and to the historical and geopolitical setting of the African continent.

The major financial institutions in the present system, the Bretton Woods twins of the International Monetary Fund and the International Bank for Reconstruction and Development, were created when the developing countries in general and the African countries in particular were colonies, with little or no say in the establishment of these arrangements. Despite changes in the international economic structure, particularly since the 1970s, neither the structure nor the operational philosophy of the Bretton Woods system has shown a significant shift to reflect contemporary realities of the situation in the developing countries, in particular with regard to their adjustment and development requirements.

The determinant of the power structure and access to the resources of the Fund is the quota system. The formula on which quotas are based takes little explicit recognition of export instability, structural imbalance, or dependence on imported inputs and therefore tends to underestimate the financial requirements of the African countries for balance of payments assistance. But more important, voting power is weighted by quota, and the amount of resources a member can draw from the Fund is predicated on the size of the member’s quota. Since the African countries as a whole have a relatively small share of total quotas in the Fund, they have been mere onlookers in the system with little or no leverage. These factors partly explain the relatively paltry flow of resources to the region from the Fund.

A serious defect in the flow of resources to the African countries the Fund’s standard conditionality that still puts rigid emphasis on demand contraction and exchange rate devaluation. Lately, there has been a hardening of the Fund’s conditionality, including a proliferation of cross-conditionality with other sources of finance, and a growing practice of tying drawings under the compensatory financing facility to other conditional arrangements. The Fund’s compensatory facility, in any case, supplied only about 4 percent of the finance that would have been required to offset the worsening of developing African countries’ terms of trade in 1980–82.1 Many arrangements have been canceled, a significant number of them in developing Africa, on the grounds that members had failed to meet the Fund’s rigid performance criteria.

The Fund’s conditionality is regarded in Africa as onerous in relation to the magnitude of the loans and, for this reason, members have shied away from using the Fund’s resources, except in dire cases. It is, therefore, not entirely correct to say that countries failed to approach the Fund early; in fact, they have been discouraged by the conditionality that they perceived to be stringent.

But more serious is the fact that the adjustment problems in the developing countries have been aggravated by the policies of the Fund. The thrust of the Fund’s adjustment programs has been to focus more sharply on reducing demand than on stimulating supply. The Fund has treated the balance of payments objective as overriding and has not been sufficiently accommodating to other government objectives in designing stabilization programs. Given the peculiar case of the African countries, restoration of a healthy payments position requires long-term changes in the structure of production and demand. Although the Fund offers some financial support, there is still scope for substantial improvement to reflect the influences of deteriorating terms of trade and other exogenous factors that have worsened the balance of payments situation in most developing countries. Admittedly, over the years, there has been some liberalization of the Fund’s conditionality, including the introduction of the new lending facilities mentioned earlier. Nevertheless, the Fund’s current approach offers only a high-cost solution, as the conventional stand-by arrangements of one-to-three years’ duration are ill suited to address the problem of structural adjustment in developing countries.

The Fund’s Articles of Agreement refer to the maintenance of high levels of employment, income, and economic development as “the primary objectives of economic policy,” objectives that the Fund can assist through balance of payments support. In practice, the Fund would appear to have treated these objectives as secondary to the restoration of payments equilibrium and has tended to neglect the potentially negative impact of its programs on the “primary objective” set out in the Articles of Agreement.

As with the Fund, access to the resources of the World Bank is largely conditioned by its operational philosophy. The Bank has traditionally perceived its main function as that of providing finance for projects and not for correcting external payments imbalances. This perception has, to a considerable extent, hindered the effectiveness of the Bank’s response to the resource requirements of the developing African countries. It is, of course, acknowledged that the Bank has recently introduced programs aimed at expanding imports, and, while it is too early to assess their effectiveness, these programs are nevertheless a step in the right direction.

The undue emphasis which the Bank places on per capita income, reserve position, savings rates, and terms of trade in evaluating creditworthiness generally counts heavily against African countries because, given the nature of their economic problems, they score low marks on these criteria. There has never been a dearth of projects in Africa to justify the region’s small share of total Bank lending. Real problems exist in the articulation and preparation of projects and sometimes in the inability of local institutions to provide local counterpart financing. In this regard, the Bank can assist positively in assessing viable projects and in the handling of local costs. Some circles, notably potential foreign direct investors, perceive that Africa is a high-risk zone, ignoring the fact that a lot of investment in Africa earns adequate return.

To some extent, the Bank has acknowledged the structural adjustment problems facing the developing African countries and has responded with its structural adjustment loan program.2 The distribution of IDA credits is generally skewed by concentration in a few developing countries, notably India, Pakistan, and Bangladesh. Together, these three countries account for well over 50 percent of IDA credits. Although there has been some noticeable increase in IDA credits to the African countries, the increase has not kept pace with their growing needs. A major constraint on the African countries’ access to this highly concessional assistance has been the inadequacy of IDA’s resources, which have been crippled by the failure of some major donors to fulfill their financial obligations to that institution. Efforts to augment IDA resources under the seventh replenishment have met with serious difficulties owing largely to the opposition of the United States of America. The U.S. action limits IDA’s seventh replenishment to $9 billion instead of the $12 billion that is required for the 1984–86 period.

As mentioned earlier, overseas development assistance flows are conditioned largely by the strategic interests of the donor countries. Historically, Africa has never been regarded of strategic importance in the global balance of power and hence has been unable to attract enough such assistance, as compared with other areas perceived as more strategic. One consequence of this pattern of flows has been a broadening of the development gulf between the African countries and other developing areas.

Lately, developing countries have been required to obtain a clean bill of financial health from the Fund as a sine qua non for further access to loans or even for renegotiation of their existing debts. This has been a source of serious friction between some African borrowers and the lending syndicates. The Fund’s seal of approval is contingent upon a prior undertaking to accept the standard stabilization program and to meet the acid test of performance criteria. In effect, the outcome of all manner of loan negotiations, debt reschedulings, or refinancings has come to depend crucially on the role of the Fund.

Finally, the present economic crisis in developing African countries calls for urgent and concerted action at the international level to ameliorate the deteriorating situation. Attention has earlier been drawn to the determined efforts being made at both national and regional levels to deal with the crisis. There is no denying that during the last few years the terrifying scale of the crisis has elicited positive response from the international community. In relation to the magnitude of the problem, however, the response of the multilateral financial institutions, especially the Fund, the World Bank, bilateral and multilateral overseas development assistance, and the private international financial markets has been totally indequate.

Measures to Be Taken

A consensus has emerged recently on the nature and causes of the present disequilibria in Africa and the policy tools to be used in addressing the crisis. What has been lacking is the political will to translate the consensus into concrete action both at the national and international levels.

Certain obvious measures can only be taken at the national level. African countries have taken, and are taking, painful adjustment measures which in some cases over time are neither socially nor politically sustainable. These countries have no choice in putting their own economies in balance but to continue to take these actions, including efficient use of the external resources which come their way. There is undoubtedly need for the African countries to be more prudent than in the past in the use of fiscal and monetary policies. And there is need to encourage agriculture in Africa.

The proposals I suggest are intended as sui generis treatment of the African countries in their relation with the international monetary system. The measures proposed could be adopted within the existing system without awaiting long-term structural reforms. They constitute not an alternative to such reform, but rather interim action urgently needed to avert catastrophic collapse and global instability, pending sustained world economic recovery and the negotiation of longer-term structural reforms.

To begin with, in order to attenuate economic disequilibria in Africa and set the stage for self-sustained economic growth and development, fundamental changes are needed in the mode and operational philosophy of the international monetary and financial system. The present crisis calls for purposive and concerted action by the international community through the transfer of adequate real resources to the African countries to complement their adjustment efforts.

With greater resources, multilateral institutions would be able to offer support to needy countries and accordingly set the stage for a movement back toward the international financial institutions, as opposed to private markets, as the main conduit for channeling international finance to developing countries, particularly the African countries.

That the Fund, the pivot of the system, needs an enlargement of resources to cope with demands of member countries cannot be overstressed. The resources of the Fund should be substantially increased to enable it to meet its obligations to members in need of financial support, especially the structurally disadvantaged least-developed countries, the majority of which are in Africa. The Ninth Review of Quotas should be advanced by at least two years, and, more important, the distribution of such additonal resources should be weighted heavily in favor of the least developed countries as a way of redressing past inequities in the distribution of Fund resources.

There should be a substantial allocation of SDRs. In light of the present economic crisis, there is a compelling need to link the allocation of SDRs with the needs of development.

Augmenting the Fund’s resources alone will not per se suffice to enhance the efficient working and equity of the adjustment process. Perhaps more important, the Fund’s rules and mode of operation must be fundamentally changed if the institution is to play an effective catalytic role in the alleviation of the economic crisis facing the African countries. Consider, for instance, the compensatory financing facility. Although this facility has been liberalized, the liberalization has not gone far enough to address the roots of the problems of the poor countries. First, drawings from the facility should ideally be related to shortfalls in export earnings and upward movements in overall import prices (rather than cereal imports only) since one of the raisons d’etre of balance of payments support is to arrest harmful cutbacks in imports. Second, the repayment period should be extended when a user is unable to reverse a shortfall in a short period. Third, compensatory drawings should be disassociated from quotas and related instead to the balance of payments needs of members. In this way, a greater number of African nations that have seen a deterioration in their terms of trade would qualify for compensation under this facility.

Although the extended Fund facility has been hailed as an attempt to address the structural and supply-side factors in the balance of payments difficulties of developing countries, it suffers from the shortcomings of traditional Fund conditionality, which attaches undue primacy to demand-side considerations. Above all, the Fund should design conditionality in a manner that takes cognizance of the peculiarities of member countries who perhaps have common problems, but by no means common adaptability.

To reverse the current downward trend in economic activity in Africa, it would be desirable to create a new Trust Fund for Africa to provide additional resources to the hardest-hit countries that face severe adjustment problems with limited access to financial markets. Drawings under the facility should be eligible for interest rate subsidy.

There is also an urgent need to work out the possible modalities for arbitration and settlement of conflict when a disagreement between the Fund and a member country has become excessively costly to the welfare and growth prospects of the borrowing country.

Similarly, the resources of the World Bank Group, particularly the IDA, should be substantially expanded to enable the institutions to meet the challenges not only of the moment, but also of the future. Because it is the least developed region within the developing world, and because of its current grave economic crisis, Africa should not only have its share of IDA resources maintained, but substantially increased. There is also a clear need for increased structural adjustment lending by the Bank beyond the present 10 percent limit, particularly in the case of the hard-pressed African countries.

To address the crisis, the Bank would need substantially to increase its program lending to the developing African countries. There is urgent need for quick-disbursing loans to finance not only imports of raw materials and spare parts, but also local costs, and to support adjustment. Furthermore, to alleviate the present crisis, it would be desirable to create a special window in the Bank, targeting exclusively developing African countries, or to earmark, say, about 50–60 percent of IDA loans for the next 10 years or so for the developing African countries.

Also important is the need to increase overseas development assistance and other forms of concessional assistance beyond their historical real levels. In this regard, donor countries whose aid has not yet reached the internationally agreed targets of 0.7 percent of their GNP to developing countries and 0.15 percent of their GNP to the least-developed countries should take urgent action to do so. Specifically, donor countries should show a willingness to transfer more aid in quick-disbursing form.

An important supplement to concessionary resource flows is the Euromarket. Nevertheless high and variable interests charged by commercial lenders have virtually eliminated balance of payments advantages expected from this borrowing by African countries. One way to minimize the overall debt-servicing cost for these countries is to charge a lower and fixed interest rate on their official loans. There is a persuasive case for conversion of official debts from loans to grants and, in the case of private debts, for longer-term maturity and grace periods. Commercial loans should be made accessible to a larger number of African countries to overcome the present concentration on a few countries considered more creditworthy.

In general, for the policies of the developing African countries to succeed, the industrial countries will not only have to generate more steady economic expansion, but will also have to make a substantial concession by offering better prices for African commodities. In addition, reasonable prospects for the resumption of growth and development in Africa, will require not only lengthening the term of its debt, but also a reduction in high interest rates. These measures are crucial to the solution of the debt problem.

In order to raise agricultural and industrial output, African countries will themselves have to pursue more realistic agricultural and industrial policies, ensuring that the new funds they borrow are for productive investment rather than for increasing consumption. Closely related is building up reserves in good years to enable these countries to withstand the inevitable fluctuations in commodity export prices.

What the African countries need now to lift their decimated economies from the abyss of retrogression is a sort of Marshall Plan for Africa similar to that designed to rehabilitate and reconstruct Western Europe at the end of World War II.

The upshot of the policy measures adumbrated above is that the African countries constitute a special case and therefore what is required is special treatment. This, in fact, is the central message in this paper. There is a compelling need for a change in attitude in the analysis and prescriptions for the African countries in the international monetary system. Hitherto, although the very serious and almost intractable economic problems of African countries have been recognized and indeed emphasized in discussions in many international fora, prescriptions for international reform have often been too general or global in approach, invariably by-passing the African countries in their implementation. Thus, even if all the current reform proposals, such as the Group of Twenty Four Program of Action and the Brandt Commission recommendations, were to be implemented, African countries would benefit only marginally.

There is therefore a plausible case to move away from the global or aggregative approach in dealing with the problems of the developing countries. In the reform of the system, special provisions or special windows must be created for the African countries, tailored to the particular and peculiar circumstances of the countries or groups of countries with similar problems.

In the final analysis, the African countries recognize that the existing structure and pattern of trade relations—a historical legacy—cannot and should not continue indefinitely. Nor can the formulation of their economic development plans be perennially contingent upon the availability of external resource inflows. For a variety of reasons, the conventional trade model that placed emphasis on foreign trade as an engine of growth is losing its power. Economic recovery, which began in 1983 in North America and Japan, has had no significant impact on the economies of the African countries. Moreover, the various prospective economic scenarios for Africa in the years ahead do not depict substantial improvement. If anything, they require further years of painful adjustment measures.

Against this background, it is imperative for the African countries to take concerted action to implement the Lagos Plan of Action which calls for economic cooperation to achieve collective self-reliance, rapid economic development, and sustained growth. The African countries have the capability and potential resources to achieve this goal. Given the present precarious economic situation in Africa, what is required is the political will to act with the understanding, cooperation, and support of the international monetary system.

In the end, it is in the mutual interests of both the industrial economies and the African countries that the international monetary system should give active support to the adjustment efforts by the African countries as a means of ensuring efficient allocation of resources and equitable distribution of the gains from economic interdependence.

1G.K. Helleiner, The IMF and Africa in the 1980s, Essays in International Finance, No. 152 (Princeton, New Jersey: Princeton University, 1983), p. 51.
2The case for substantial transfer of real resources to Africa has been reinforced in the World Bank’s study, Toward Sustained Development in Sub-Saharan Africa: A Joint Program of Action (Washington: World Bank, 1984).

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