Chapter

Alternative Approaches to Stabilization in Africa

Editor(s):
Gerald Helleiner
Published Date:
March 1986
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Author(s)
John Loxley

Author’s Note: Don Hurst assisted with background data, and Gerry Helleiner provided useful advice in the preparation of this paper, whose responsibility is the author’s alone.

The economic crisis in sub-Saharan Africa (SSA) is well documented (World Bank (1981, 1983, 1984)). Sharp falls in per capita income since 1980 have followed a decade in which growth per head was either negligible or, in the case of the poorest countries, negative. For many countries, chronic food shortages are the most serious aspect of the crisis and are the outcome of a failure of production to keep pace with population growth in the 1970s, and of a significant, largely drought-induced, fall in output since 1981. The result has been starvation in the extreme cases, widespread malnourishment, and a heavy dependence by most countries on food aid and other food imports.

The crisis has also been characterized by acute import volume compression or contraction, which many observers see as the principal cause of domestic difficulties in SSA (Green (1984)). A severe 10.6 percent cut in real imports in 1982 followed a decade of low import growth for SSA on average and of absolute reductions in imports for the poorest countries. Restricted access to imports has reduced output and caused excess capacity and rising unemployment in industry, agriculture, and services and a consequent deterioration in sales tax and income tax collections by governments. It has also undermined the export capability of many countries. Adverse trends in the availability of imports have been compounded by an instability in import supply which in turn, has been associated with poor growth performance in SSA.

Underlying the import problem has been a deterioration in the terms of trade stretching back, for non-oil producers, well into the past decade, which was of massive proportions (13 to 14.5 percent) in 1981–82. Export volume growth was also negative for SSA in the 1970s and markedly so during the recent global recession. Import problems would have been more acute, however, had foreign aid not risen over fourfold in nominal terms since 1970 (including a significant rise in export credits) and had SSA countries not drawn down their foreign reserves nor increased their import payment arrears over this period. An important characteristic of the current crisis is, however, the drying up of financing options. Foreign aid appears to have stagnated, foreign private investment has been halved, large debt services payments are falling due, reserves are at an all time low, and import arrears have probably peaked. The prognosis is equally grim. No dramatic improvements in the terms of trade are expected in this decade and, without emergency assistance, net capital inflows are likely to fall from $11 billion in 1980–82 to only $5 billion in 1985–87 (World Bank (1984)).

Nature of Fund Conditionality

It is in this context that both the need for Fund assistance and the appropriateness of the conditionality attaching to that assistance must be judged. Since 1979 no fewer than 27 SSA countries, or over 60 percent of the total of SSA members of the Fund, have turned to the Fund for emergency balance of payments assistance. Thus, a majority of SSA countries have had their economic policy shaped by the Fund through conditions attached to that assistance.

Fund programs have received careful scrutiny in recent years (Williamson (1983); Killick (1984); Helleiner (1983); Nowzad (1981)). In general, their objective is the “restoration and maintenance of viability to the balance of payments in an environment of price stability and sustainable rates of growth” (Guitian (1981)). While the detailed content of programs varies from country to country, some common elements are clearly discernible. They usually consist of a mix of demand restraint measures and of policies designed to “get prices right.” Demand management usually implies restraining or reducing budget deficits by cutting expenditures, by abolishing subsidies on such items as urban food consumption, or by the raising of taxes or user fees on government services. Price adjustments entail introducing “realistic” exchange rates, “adequate” prices for producers and exporters, the reform of price-distorting tariff and subsidy schemes, the use of interest rates to mobilize savings and allocate investment and the “liberalization” or decontrol of exchange and trade systems.

While there seems to be little quarrel in SSA over the principle of conditionality, there have been major disagreements with the Fund over the nature and severity of conditionality in practice. President Nyerere of Tanzania has accused the Fund of excessive policy intervention and paternalism, and undoubtedly echoed the sentiments of other African governments who have found themselves in dispute with the Fund when he asked, “When did the IMF become an International Ministry of Finance? When did nations agree to surrender to it their power of decision taking?” (Nyerere (1980)). Also, a number of African scholars and officials were prominent signatories of the Arusha Initiative (1980), which rejected the Fund’s approach to conditionality on the grounds that it is not “scientific,” “objective,” or “neutral.”

In what follows, we shall examine some of the reasons for discontent with Fund conditionality and, drawing on these, attempt to sketch out in general terms what an alternative approach might look like. In fairness to the Fund, it is important to point out in advance that it does not accept many of the criticisms levelled against it (see Nowzad (1981), de Larosière (1984a), and Dale (1983)) and does not therefore share the enthusiasm of its critics for the reform of its approach to stabilization.

Practical Case for Alternative Approaches

The case for seeking an alternative approach to stabilization to that espoused by the Fund rests on both practical and theoretical grounds. The strongest practical argument is that the Fund’s record in SSA is relatively poor. There is no evidence that the performance in the 1970s of low-income countries (most of which are in SSA) in terms of balance of payments, growth, inflation, savings, and investment was any better for countries with Fund programs than for those without (Loxley (1984a)). What is more, in a study of adjustment experience in 1980–81, the Fund itself admits that in only a minority of cases were its targets met by African countries. Growth targets were reached in only 5 out of 23 programs, inflation targets in only 13 out of 28, and trade targets in only 11 out of 28 (Zulu and Nsouli (1983)). What is more, between 1980 and 1982, there was a steady increase in the proportion of African programs breaking down in their first year from 36 percent to 58 percent. Though some of these were undoubtedly renegotiated, breakdowns are nevertheless costly in terms of disruption, frustration, and delay.

Although the record is quite clear, there is no agreement on the factors that explain it. The Fund argues that slippages in implementation were to blame for the poor performance and were the result of “the emergence of unforeseen developments, difficulties in mobilizing sufficient political support for the requisite adjustment measures, limitations in the administrative infrastructure, overoptimistic targets, and delays or shortfalls in net inflows of development assistance” (International Monetary Fund (1983)). The Fund then argues that slippage could have been avoided if adjustment efforts had been intensified. In other words, it believes that policy failings of African governments were responsible for shortfalls in implementation. Yet even a cursory glance at the Fund’s own explanations would suggest that the design of programs left much to be desired. They clearly imply that the Fund did not allow for flexibility in programs to accommodate “unforeseen developments,” and that programs were too ambitious relative to what was feasible in economic, administrative, and political terms.

Neither of the above studies addressed the question of what would have happened in the absence of a Fund program. In the past, the Fund has argued that even partial implementation of its programs was helpful in preventing “the crisis situation that would have developed had no program been in effect” (Reichmann (1978), p. 41); but a more recent study has concluded that there is at best, only “a moderate connection between program execution and the achievement of desired economic results” (Killick (1982), p. 38).

The practical case for alternative adjustment programs to those of the Fund rests therefore on the lackluster performance of African countries operating under Fund stand-by arrangements even when Fund criteria were met, and on the Fund’s own explanations for the difficulties encountered in implementing its programs. It does not rest on complete counterfactual tests because we are not in a position to know how countries would have performed on alternative programs to those designed by the Fund.

Theoretical Case for Alternative Approaches

There are in addition, however, sound theoretical reasons why Fund programs might be expected not to work too well in this part of the world. SSA economies have a low capacity to adjust (Dell (1983) and Helleiner (1983)) because their problems are structural. This means that they are not particularly susceptible to treatment by an approach which is heavily oriented toward demand restraint and short-term adjustments. Since this structuralist critique is central to the case for alternative approaches to stabilization, it is worth discussing at some length.

To begin with, the most critical constraint on adjustment efforts in SSA is foreign exchange availability, but this is unlikely to be eased significantly by standard Fund measures. Domestic demand restraint can be expected to have little impact either by way of reducing import expenditures or by freeing up local goods for expanded export earnings because the substitutability of traded for nontraded goods is generally quite low in SSA; imports do not compete with goods produced locally, while exports are not usually consumed locally to any significant degree. The possibilities of improving the balance of trade through expenditure switching are, therefore, quite limited (Crockett (1981)).

Structuralists also tend to be less sanguine about the ability of large devaluations to stimulate improvements in the balance of payments. Individual SSA economies fit the “small economy” assumptions and can therefore generally export as much as they can produce at the going world price. In this situation the Marshall-Lerner condition for a devaluation to improve the balance of trade in foreign exchange terms is, quite simply, that the sum of the elasticity of supply of exports and the elasticity of demand for imports exceeds zero (Williamson (1983c)). Given these conditions, it is clear that a devaluation cannot cause a deterioration in the trade balance in SSA; but structuralists argue that there are grounds for believing that improvements may, at best, be minimal and may take time. Exports may not respond much to price incentives partly because of the limited opportunities for expenditure switching discussed above, but more especially because non-price factors are often the crucial constraint on their expansion. Thus, if incentive goods are not available to peasants or if intermediate and capital goods are in short supply, an increase in local prices paid to exporters may achieve little other than the worsening of inflationary pressures. This is, of course, not so much an argument against the use of price incentives as one against their being used in isolation from measures designed to solve the short-run “goods famine” that often hinders exports.

Expanding the capacity of tree crop or mineral exports also takes time so that output may respond only three to five years after the initial price stimulus. Promoting nontraditional exports, such as manufactured goods, requires much more than correct pricing incentives. It presupposes a reasonably welldeveloped manufacturing sector and an ability to penetrate foreign markets that implies overseas contacts, product quality, and appropriate credit systems. Few SSA countries could meet these requirements and certainly not within the one-year timeframe of most Fund programs.

On the import side, an adjustment in relative prices through devaluation may also fail to have the desired effect. Where imports are licensed, an increase in their domestic currency cost may succeed only in reducing the large rents accruing to license holders and have little impact on overall import demand. If, as in many SSA countries, excess demand for imports is large, if the state sector is a major importer, and if aid is important in total imports, then again price increases may have a negligible impact on overall import demand. In this connection, it is worth noting that non-food consumer imports are already quite low in most of SSA, being on average less than 10 percent of the total and as low as 5 percent for countries such as Tanzania (U.N. (1984)). The impact of import contraction, however induced, would inevitably fall, therefore, on intermediate and capital goods imports, thereby further disrupting current output or future growth.

For individual countries in SSA, export-supply elasticities and importdemand elasticities may, therefore, be quite low. Inflexibility and fragmentation remain the hallmarks of African economies. These characteristics have important implications for the speed with which adjustment to fundamental imbalances can occur.

The devaluation issue has been particularly controversial in SSA, and on this issue structuralists have disagreed strongly with the approach of the Fund. The Fund’s preference for relatively large adjustments in advance of quite small amounts of balance of payments assistance is seen by some as a prescription for inflation and political instability. It is held that supply elasticities are such that price increases would rapidly erode attempts to depreciate the real effective exchange rate and that this raises questions about the usefulness of this instrument (Singh (1984)). Yet even critics acknowledge the case for devaluation where, for reasons of domestic inflation “the cost of production of a country’s staple exports… ha(s) got seriously out of line with world prices expressed in terms of local currency at the prevailing rate of exchange” (Kaldor (1983), p. 36). A devaluation may also be justified if other attempts to raise export prices have led to large producer subsidies being granted from the budget of the government or parastatals. Thus the question to be faced by SSA governments experiencing overvalued real exchange rates is not whether to devalue but how; they must decide by what amount and over what period adjustments will be made. These decisions will be very much influenced by the amount and phasing of financial assistance available to ease supply inelasticities and by one’s views of the capacity to adjust of SSA countries.

Structuralists would also question the preference of the Fund for the introduction of positive real rates of interest. It is argued that these too can contribute independently to both inflation and recession when interest costs are a significant proportion of total costs of production (Taylor (1981, 1983)). At the same time there is no evidence that real savings respond in a marked positive manner to increases in the rate of interest (Giovannini (1983)). There is some evidence from elsewhere that increases in interest rates cause financial savings to increase (Lanyi and Saracoglu (1983)), although sometimes the apparent increase represents no more than a shift from informal to formal markets (Wijnbergen (1982)). Fund analyses which postulate capital moving freely between SSA countries in response to differentials in real negative rates of interest seem, however, to be positively fanciful (Loxley (1981)). It should also be noted that even proponents of market rates claim no close association between increased financial saving and real growth (Lanyi and Saracoglu (1983)).

Those who emphasize the structural nature of the causes of crises would be less enthusiastic than the Fund about the need for, and possibility of, rapid adjustment. They argue that the shock treatment often involved in Fund programs “can seriously weaken the capacity for real adjustment” by preventing increases in production and required changes in the composition of output, as well as by prejudicing the political sustainability of programs (Nelson (1984)). Even though “it may sometimes involve rather high costs in terms of growth and employment” the Fund justifies this approach on the grounds that “it can be expected that important benefits will follow in short order, and over time the net benefits may be greater than if a more gradual course had been chosen” (Mookerjee (1982)). One will note that there is no claim that greater net benefits will inevitably flow from this approach.

It can be argued that SSA is less able than other parts of the Third World to absorb shock treatment because of its low absolute per capita incomes and, in the case of the poorest SSA countries, because per capita incomes have been falling steadily for over a decade now. The Fund itself claims to be sensitive to this structural reality and maintains that in its 1980–81 programs the emphasis was on gradual, medium-term adjustment, with allowance being made in a number of cases for deteriorating inflationary and balance of payments circumstances over the short run. In some cases, even budget deficits and domestic credit were allowed to expand (Zulu and Nsouli (1983)). It is difficult to deal with this claim without access to more information, but three comments would seem to be in order. To begin with, this picture of Fund approaches in Africa is incomplete because it excludes countries with which the Fund was not able to reach agreements. Thus, in Tanzania, the Fund has been insisting since 1981 on shock treatment of a particularly severe kind, to a degree that might not have been sustainable politically. Second, there is evidence to suggest that quite large adjustments were indeed required of some SSA program countries in 1980–81. In some cases money supply growth fell significantly, by 20 percent or more, while at least two countries experienced extremely large devaluations (Uganda, 90 percent, and Zaïre, 40 percent, in terms of the dollar). Third, and perhaps most relevant of all for the purpose at hand, Fund conditionality has certainly been tightened up since 1981 (Williamson (1982)). Whether this is the result of a shift in the politics of the institution, as some claim, or whether it is merely a reflection of a more difficult global situation, including the Fund’s own resulting resource constraint, as the Fund maintains, it is nonetheless a reality with which SSA has to live. One indication of this is to be found perhaps in the marked increase in the incidence of devaluation required of borrowers between 1981 and 1983.1

Critics of the Fund also complain about the inappropriateness of its performance indicators. They accuse the Fund of practicing pinpoint targetry in situations in which data deficiencies and shortages of skilled staff imply quite long time lags between the emergence of a problem and its identification (Helleiner (1983); see also Loxley (1979) for a practical example of data problems in Africa). They question the theoretical relevance of Fund performance criteria in terms of the strength of their relationship to real economic variables. Above all, they note that almost all the criteria are short run and demand oriented, notwithstanding the Fund’s formal commitment to supply stimulation (Killick (1981) and Williamson (1982)). In defense, the Fund argues that its indicators are “subject to unambiguous reading” (Beza (1983)) and, in any case, cover variables that are monitored routinely by all governments.

The distributional implications of Fund adjustment measures have also been the subject of contention in SSA. Fund programs make no attempt to guarantee employment levels nor to preserve or extend the provision of basic needs (Brandt Commission (1980), pp. 215–17). They often have their most negative effects on low-income urban dwellers by raising unemployment, by cutting subsidies and government spending, and by raising inflation while restraining wage adjustments. But the rural poor may also be affected adversely by cuts in spending and may benefit little from changes in the internal terms of trade. In both groups, evidence is beginning to emerge that children and women are particularly vulnerable (UNICEF (1984), Green (1984)).

The issue of distribution is tied closely to those of shock treatment and political sustainability. Even where the economy as a whole is subject to only moderate reduction in growth rate as a result of austerity, this may be converted into a very significant proportionate decline for particular groups within the economy and, for this reason, may not be politically feasible.

The Fund’s view is that income distribution is the clear political prerogative of member governments. Nevertheless, it maintains that, insofar as its measures shift the terms of trade toward the rural sector, they have a bias in favor of the poorer sections of society. Given the relatively low degree of differentiation in rural Africa, the argument has some merit, but it needs tempering to take into account the fact that urban/rural differentials appear to have narrowed significantly in SSA in recent years, and that the needs of both the urban and the rural poor are pressing in an absolute sense. The distributional impact of Fund programs is not estimated in advance and does not apparently form part of the negotiations with potential borrowers. There is no suggestion here that equity is a universal concern in SSA; unfortunately the reality is otherwise. Nor does one wish to imply the the Fund should press for greater equity where this is not a priority of governments; this would be as utopian as it would be fruitless. What is implied, however, is that the Fund be more open to negotiating the distributional impact of programs with governments for whom it is a matter of concern. What must be resolved in each concrete situation is the degree to which alternative distributional goals would “inevitably neutralize the effects one was seeking in the first instance” (Williamson (1982)).

Debate has also centered around the analytical, some would say ideological, preference of the Fund, for greater reliance on market forces in economic decision taking. Allowing domestic prices to move into line with world prices is one expression of this preference, but it also extends to liberalizing domestic markets in general. On efficiency grounds, therefore, the Fund presses for reductions in state intervention in the form of price, exchange and import controls, and of market-distorting tariffs and subsidies. The case against this emphasis is that market prices are suspect as guides to efficient resource allocation or optimal investment in a context in which social costs and benefits deviate from private ones, which is especially likely to be the case when farreaching structural changes are taking place in the economy. Decisions based on market prices may also be unacceptable on distributional grounds or when markets are narrow and imperfect. Structuralists would argue there is a case for the use of controls or direct state intervention in SSA and that prices are so “profoundly important that markets cannot in general be trusted to set them” (Williamson (1983b)).

Thus, even if in the present circumstances it might make sense to move some prices in the same direction that the market is moving them, it does not follow that complete laissez-faire is the answer to SSA’s problems.

The strategic thrust of Fund adjustment measures is toward integrating its members more fully into the world economy through trade and payments liberalization. In this respect, Fund conditionality is entirely consistent with the purposes of the Fund as laid down in Article I of its Articles of Agreement. On the trade side, the emphasis is very much on export promotion, while on the payments side Fund policies serve to enhance the internationalization of capital in the form both of bank debt and of direct investment. Indeed, the Fund goes so far as to argue that “(e)xpanded flows of direct investment to the developing countries are in everybody’s interest… Thus the Fund is encouraging developing countries to remove obstacles to such flows and to place greater emphasis on policies designed to attract foreign private investment as part of their development strategy” (de Larosière (1984b)).

These strategic emphases may not be acceptable to all Fund members all of the time. Some SSA countries would take a much more cautious approach than others to encouraging foreign private investment, and for sound historical, ideological, and even narrowly economic reasons. Some might be quite skeptical that an open door policy would result in much of an additional capital inflow. Fund programs might, therefore, simply result in better terms being given to capital which would have flowed in anyway. More important (since there is little the Fund can do or would wish to do to impose private enterprise on unwilling member countries), the Fund’s commitment to an outward-oriented growth strategy might also be found objectionable by some member countries. A strong case can be made that this underlying strategic thrust to Fund conditionality is not consistent with that prescribed by the Lagos Plan of Action (LPA) to which over 50 African governments are signatories. The LPA called for the design and pursuit of a uniquely African strategy based on “internally generated, self-sustained processes of development,” and on “national and collective self-reliance.” Central to this strategy is an explicit drive towards self sufficiency in food production, greater regional integration, and less reliance on traditional exports and markets (O.A.U. (1981)). These strategic emphases are for the most part quite at odds with those of the Fund, and it is instructive that in the review of its own performance in SSA, the Fund apparently makes no mention of the LPA. This is perhaps not surprising since the literature on stabilization is remarkably silent on the issue of economic strategy, even when it is proposing alternatives to the orthodoxy (Stewart (1984)). It is almost as if the unwritten assumption is that stabilization measures are short-term adjustment measures applicable to any conceivable range of long-term economic strategies. Yet this may not be so. Short-run stabilization policies have important implications for the development of the economy in the long term. The redirection of incentives and institutions in the short term may lock countries into certain development strategies for many years.

Member governments will, of course, have differing degrees of commitment to alternative strategies, such as those outlined in the LPA, and hence differing degrees of difficulty in accommodating the strategic thrust of Fund stabilization programs. There is, however, no evidence that the Fund is in any way sensitive to the issue of alternative approaches to economic strategy in SSA or that the Fund adjusts its approach to accommodate governments pursuing quite different economic strategies from those it advocates. What is clear is that the approach of the Fund would only indirectly, if at all, address the strategic issues raised in the LPA and is more likely to entrench African integration into the World System as a whole than to encourage “inward looking” regional integration.

Two quite separate issues are involved in the discussion of strategic alternatives. The first is how efficacious different approaches are in meeting longrun development objectives. The second is national sovereignty. There is little doubt that the Fund would question the desirability of those that might not appear to be justified by immediate static comparative advantage or by reference to short-run efficiency considerations in general. Equally, the LPA arose out of frustration with the difficulties faced by SSA in its integration with the international trade and financial system as it now operates. There are therefore legitimate differences between the Fund and some SSA governments over what alternative strategies are likely to achieve in the long run. Since 1981, the export-oriented model of growth is looking much less like the panacea some thought it to be (Balassa (1982)). Its superiority seems to have been exaggerated theoretically (Streeten (1982)) and, for many countries, in practical terms (Cline (1982)). Now, more than ever, it seems appropriate to consider strategies that recognize the realistic limitations of export orientation for the poorest countries and which, at the same time, deal explicitly with the most serious problem facing most of SSA—the food problem.

There is therefore a strong case for the Fund to demonstrate more flexibility and sensitivity in its strategic prescriptions for SSA and to be more open to considering alternatives. Unfortunately, there is no evidence that the Fund is moving in this direction, and there are fears that instead it may use the considerable leverage it possesses by virtue of its role as lender of last resort to override the viewpoints of member governments. The issue of leverage and interference with national sovereignty is particularly live when the range of financing options open to governments is so severely restricted.

World Bank Approaches to Structural Adjustment and Conditionality

It has been suggested that some of the shortcomings of the Fund’s approach to stabilization might be remedied if it was to adopt the type of conditionality attached by the World Bank to its structural-adjustment lending. This consists of a series of essentially supply-oriented policy conditions that borrowers must meet. The main emphasis is on price reform, raising institutional efficiency, reviewing investment priorities, and improving the management of foreign debt. The Bank avoids pinpoint targetry and reliance on a handful of demand oriented macroadjustments. In this respect, it is not dissimilar to the real-economy approach to conditionality advocated by the Overseas Development Institute (ODI) (Killick and others (1984)).

Despite these strengths, there are, however, a number of problems with World Bank conditionality in this form. To begin with, Bank conditionality is almost always superimposed upon Fund conditionality, subjecting borrowing countries to a double dose of external policy leverage. It is, therefore, not a substitute for Fund conditionality but a complement to it. This makes it even more demanding in political terms than conditionality alone, a factor acknowledged by the Bank in explaining why so few countries, and especially poorer ones, apply for or qualify for structural adjustment loans (World Bank (1984)). Furthermore, World Bank programs invariably follow Fund programs, and it could be argued that this is the reverse of what is desirable if structural issues are to be given the priority they warrant.

World Bank conditionality does not deal, however, any better with the strategic questions raised earlier. It is, if anything, even more explicit than the Fund in its advocacy of market-oriented and outward-looking strategies. The Berg Report on which conditionality in SSA is apparently based, has been criticized by African governments for this emphasis and for uncritically extolling the virtues of expanding the private sector. Furthermore, critics have objected strenuously to the lack of emphasis by the Bank on food security (African Caucus (1982), Green (1983)), and to its apparent abandonment of a commitment to greater equity and the meeting of basic needs (Loxley (1984c)). Above all, African governments were especially disturbed by the basic assumption underlying structural-adjustment lending and the Berg Report, namely, that domestic policy shortcomings were the principal cause of the crisis in SSA. This finding is contradicted by a study commissioned by the Bank which found that “environmental” factors were more important than policy shortcomings (Wheeler (1984)). More recently, Bank publications have acknowledged the contribution of external shocks, played down the desirability of promoting greater rural inequity, and have addressed food problems more explicitly (World Bank (1983, 1984), but otherwise the Bank’s policy prescriptions parallel closely those of the Berg Report and are entirely consistent with those of the Fund.

Financing versus Adjustment

Some critics of the Fund would argue that its stabilization programs involve a blend of finance and adjustment that is too heavily skewed toward adjustment. While the Fund has considerable discretion in determining this blend, it has opted, in recent years, to restrict the amount of finance it provides to countries undertaking adjustment programs. Thus, during the most recent economic crisis, the Fund chose not to reactivate special facilities such as the oil facility or to reinstitute Trust Fund loans; nor, since 1981, has it made further allocations of SDRs. In addition, while quotas were increased in 1983, the amount that could be borrowed from the Fund as a percentage of quota under normal circumstances was reduced. The net effect is that low-income countries can borrow, on average, 11 percent less than they could before quota revision (Loxley (1984b)), and SSA countries can borrow 8 percent less. The absence of special funding arrangements has also meant that the proportion of finance made available by the Fund on low or unconditional terms (excluding drawings in the reserve tranche) has fallen dramatically—from 76 percent in 1979/80 to almost zero in 1982/83 (Ibid.). Since 1983, the compensatory financing facility has also been converted into a high conditionality source of finance, and steps have been taken to neutralize the effect of the quota increase on members’ ability to borrow from this source.2

The net effect of these developments has been that the Fund provided less than a fifth of the financing of SSA balance of payments deficits in 1982/83 at the peak of the balance of payments crisis, while in 1983/84 the net flow of Fund resources to SSA was almost nil.3 Looked at from another point of view, net Fund credits were well below 10 percent of the impact of external shocks (terms of trade losses, reduce export growth, interest rate increases, and natural disaster losses) experienced by SSA after 1977. Despite assertions to the contrary by Fund staff (Zulu and Nsouli (1983)), there is also little evidence that Fund agreements have acted as catalysts in securing commercial bank loans for SSA (Loxley (1984a)).4 Thus, an acute shortage of liquidity has forced SSA governments to run down their reserves and to fall into serious arrears on payments for imports. Above all, it has compelled them to adjust to the crisis by severe cuts in real imports.

A number of observers feel that the degree of adjustment required of SSA is both unwarranted and inequitable. It is the result of an approach to global equilibrium that places responsibility for adjustment almost entirely on the shoulders of deficit countries, since the Fund has little leverage to exercise over countries persistently in surplus. While this asymmetry was relaxed somewhat at the height of the debt crisis with the Fund pressuring creditors to cooperate in crisis management and advance more credit than they might have done otherwise, low-income countries were untouched by this development. Yet, many who feel that the crisis in SSA overwhelmingly results from external shocks also believe that the international community, and especially the international agencies, have an obligation to ease the burden of adjustment by the provision of much larger amounts of unconditional liquidity than has been the case in recent years. While the Fund acknowledges the need for greatly expanded concessional funding to poor countries, it does not believe it should be the source (International Monetary Fund (1982)); nor does it accept that the origin of disequilibrium in these countries should dictate the blend of financing and adjustment required. As Mikesell (1983) has put it, “(t)here is nothing in the cause of a country’s payments imbalance that relieves it of the necessity for adjustment, given the limitations on the availability of external finance.” It is, however, the view of critics that to a large extent the limits to Fund financing are self-imposed, though there is no evidence that the Fund and the major countries that control it are in disagreement on this issue.

Fund critics also bemoan the fact that the trend toward more conservative approaches to financing by the Fund has been accompanied by a retreat from lending under the extended Fund facility. This facility provides for drawings up to three years and allows longer repayment periods than normal stand-by arrangements. It was introduced to permit Fund programs to be explicitly supply oriented and although it was usually superimposed on traditional demand restraint approaches, often with even tighter credit ceilings than under stand-bys (Killick and others (1984)), it did hold out the promise of more enlightened adjustment strategies for a while. This promise was apparently realized with the Indian loan of 1981 which provided for adjustment with growth. It appears though that the United States felt that this type of assistance was not in keeping with the Fund’s mandate as a lender of last resort, and hence from that time the Indian case has not been allowed to act as a precedent (Dell (1984)).

The one hopeful development on the financing side in recent years is the World Bank’s “Joint Program of Action for sub-Saharan Africa.” Originally proposed as a $2 billion a year additional aid package (World Bank (1984)) and now apparently scaled down to $1 billion, this proposal aims to mobilize funds from bilateral donors. Funds will, however, be made available only to SSA governments pursuing acceptable adjustment programs, and there are concerns that policy requirements will follow closely those outlined in the Berg Report and that donor leverage will be increased significantly. Also, in a World Bank paper outlining the possible impact of the Joint Program on specific SSA countries, all four case studies are countries with Fund programs in place or under discussion, which suggests that World Bank balance of payments funding will continue to be tied to Fund adjustment programs despite their shortcomings.

Obligation of African Governments

In arguing the weaknesses in Fund and Bank approaches to adjustment and the case for a less burdensome blend of financing and adjustment, it is not my intention to play down the responsibilities of SSA governments to meet their crises speedily and resolutely. Nor does one wish to absolve SSA governments from past errors of policy and from weaknesses in administration. SSA governments have undoubtedly often pursued policies that have exacerbated external shocks. There has been a pronounced anti-rural bias in policy and this has contributed to declining rural surpluses. Investment resources have been used unproductively with much lower growth rates than one might reasonably expect when investment rates exceed 20 percent, as they have on average in SSA in recent years. The export sector has been neglected and there has been a failure to recognize that this sector, traditional or otherwise, would necessarily have to be relied upon for many years to assist economic transformation. There has also been in many SSA countries an explosion of unproductive and expensive bureaucratization, and the expansion of state control and intervention to the very micro-level of the economy, with serious implications for efficiency and the surplus.

Recognition of these problems is essential if the crisis in SSA is to be dealt with effectively. The motive behind proposals for alternative approaches to stabilization and adjustment must not be to remove the obligation of SSA governments to “put their own house in order.” Much of the diagnosis by the international institutions of domestic policy shortcomings in this part of the world has validity and must be addressed. For this reason, alternative prescriptions will unavoidably contain many similarities with those advocated by the Fund and Bank, so much so that the casual observer may conclude that “their differences are dwarfed by their commonalities” (Please (1984), p. 94). A central thesis of this paper is, however, that SSA governments can meet their obligations within the framework of approaches to adjustment that have quite different economic, social, and political implications from those of more orthodox approaches, although whether or not one describes them as “radically different” (Payer (1983)) is a matter of judgment.5 We now turn to consider the possible content of such alternatives.

Alternative Approaches to Stabilization

The justification for alternative approaches to stabilization lies, therefore, in the weak theoretical underpinnings of the Fund’s current approach as well as in its indifferent track record in practice. Yet, the Fund is in no way restricted by its Articles or by any other legal requirements to one particular approach to stabilization. On the contrary, the 1979 guidelines on conditionality require the Fund to pay due regard “to the domestic, social and political objectives, the economic priorities and circumstances of members, including the causes of their balance of payments problems” and they allow the Fund to vary the performance criteria required of members according to the “diversity of problems and institutional arrangements” they face (Gold (1979)). These guidelines suggest that the Fund has much greater leeway in its approach to conditionality than it has chosen to exercise to date. Proponents of alternative approaches go further and argue that the various objectives of the Fund are themselves potentially contradictory and that on these grounds alone a strong case can be made for greater flexibility in the design of stabilization programs since “…a number of policy packages may be equally consistent with the Articles” (Stewart (1984), p. 203).

The lack of alternative approaches in practice reflects, therefore, neither an absence of need for them nor any legal or constitutional impediments faced by the Fund in considering them. Rather, it is explained in part by the Fund’s commitment to a particular view of adjustment and in part by the absence of clearly articulated alternatives (Thorp and Whitehead (1980)). Of these two problems, that of Fund intransigence may be the more difficult to deal with since, on the rare occasions that they have been developed, the Fund has not been receptive to alternatives even when they appeared to be both internally consistent and feasible.

In outlining the nature of possible alternative adjustment programs one can be guided by the perceived shortcomings of Fund programs outlined above. To begin with, and in contrast to the Fund approach, the (essentially) structuralist critique does not provide a blueprint for adjustment to be applied in all circumstances. Rather, it suggests that alternative programs should be tailored to the structural characteristics of the country in question, to deal with the specific economic problems being faced at any particular time. Thus, programs could be expected to vary greatly between countries depending upon their economic structure and the precise causes of their instability. Likewise, the mix between finance and adjustment would also vary according to these factors to a much greater degree than it does now with relatively more finance being made available where exogenous shocks are clearly the major source of instability.

Member governments would be much more actively involved in the design of alternative programs than they appear to be at present. This would be justified on the grounds that “conditionality…must reflect the sovereign right of states to choose their own social and economic models and development paths” (Arusha Initiative (1980)). Moreover, without this enhanced involvement, the effectiveness of programs is likely to continue to be severely limited simply because programs that are imposed do not hold. Members would be free, of course, to call on assistance from outside agencies and individuals; the essential point is that governments would enter into negotiations with the Fund with their own clearly articulated, internally consistent, and feasible set of proposals to deal with instability.

Ideally, alternative programs should provide for adjustment with economic growth. They should recognize, therefore, that the import constraint is the single most important factor limiting both domestic and export growth in SSA economies. Accordingly, programs should provide for external assistance to as far as possible precede or, at worst, accompany, major policy changes. The argument for this is that unless consumer and intermediate goods are available, increased prices and other incentives will achieve little by way of stimulating exports or production in general and will tend, simply, to be inflationary. Yet there are time lags of several months between the receipt of foreign exchange assistance and the availability locally of incentive and intermediate products (three to four months in many cases). It will be much easier for an economy to absorb the strains of policy adjustment if programs are front-end loaded in terms of finance. While this reduces Fund sanctions over noncompliance with agreed-upon terms, it greatly reduces the risk of noncompliance in the first place. Alternative programs would therefore assume a very different phasing of both assistance and adjustment measures from those of the normal Fund programs.

Expanded imports resulting from an agreement would be allocated in a very selective manner to priority sectors and products using both market and nonmarket means, with the three principal objectives being restoring the output of crucial, locally produced basic needs or incentives goods, promoting exports, and raising production of important tax-revenue generating products.

Supply expansion would be the essence of alternative approaches and adjustment would focus on a limited number of key sectors and on selective, as opposed to economywide, policy initiatives (Foxley (1983)). Increased food security in terms of basic foodstuffs (as opposed to luxury products, such as wheat or sugar) would undoubtedly be a major preoccupation of SSA adjustment programs given the catastrophic situation in much of the continent. Indeed, it could be argued that this should be the prime focus of African adjustment efforts at this time, since success in this area would achieve multiple objectives; it would directly contribute to the meeting of basic needs; it would almost certainly be progressive in its distributional impact, given the structure of land ownership in most of SSA; it would reduce the import bill of many countries by between 5 and 25 percent and heighten self-reliance and national economic integration; it would contribute to growth and, in the medium term, would serve to reduce both inflationary pressures and the need for government subsidization of urban food consumption. Reliable food surpluses might also constitute a solid foundation for the growth of manufacturing industry (Adelman (1984)). No other sector is likely to offer such attractions to most SSA countries at this time. There are, therefore, compelling reasons for a food-security stabilization strategy in SSA, a strategy which would be entirely consistent with the Lagos Plan of Action.

Critics of this strategy, such as Chester Crocker, U.S. Assistant Secretary of State for African Affairs, would argue that “some old shibboleths badly need re-examination, including the notion that a country must physically produce its own food supplies, when in some cases it may be more efficient—and no less self-sufficient—to concentrate on cash crops and buy food with the money thus earned” (Browne and Cummings (1984), p. 55). While there is some obvious truth in this, the critique is oversimplistic in that it fails to appreciate the implications for food security of volatile cash-crop export earnings. Problems of planning, administration, and communications in SSA may also impede the conversion of cash-crop earnings into food consumption. At the same time, policies designed to expand cash-crop exports, and especially the “progressive” farmer policies advocated in the Berg Report, may have the effect of concentrating land ownership, thereby reducing the land entitlement, and hence the food entitlement, of former food producers (Sen (1981)). Efficient specialization may therefore be perceived to carry prohibitively high costs in enhanced food insecurity at both the personal and the national level.

In the context of SSA, there is also a widely held view that a people who cannot feed themselves is a people not in control of their destiny (Browne and Cummings (1984)). This view informed the Lagos Plan of Action and has undoubtedly been strengthened by the events of recent years. While seeking generally to redress the general bias against the rural economy, if there is any trade-off between promoting food production and promoting cash-crop exports, SSA adjustment programs should therefore err on the side of the former, since the potential human costs of a mistaken emphasis in the other direction are unacceptably high. This is not to say that food imports would be avoided at all costs; only that policy would aim for stable and reliable food supplies taking one year with another. Imports would still be drawn upon as a last resort, but to a much smaller extent and less frequently than at present.

In practical terms a food-security policy would involve not only correcting the bias against the rural sector in domestic terms of trade, but also developing an appropriate structure of relative prices between food production and export crop production. On the whole, both the Fund and World Bank programs have been much more concerned with the former than the latter. Little attention has been paid to the cross-elasticity of supply between food and cash exports and certainly no explicit weight seems to have been given to the desirability per se of food self-sufficiency in Fund and Bank adjustment programs. Both these weaknesses would require rectification.

Food-security policies could usefully draw on the deregulation emphases of orthodox adjustment programs—encouraging greater flexibility in food marketing at the local level by permitting small-scale private or cooperative traders and the free transfer of food within national boundaries. Where large, state-owned marketing boards have a poor record of efficiency, they might usefully restrict their involvement to managing strategic reserves and imports to ensure the availability of food for the urban population. Greater food security may, in addition, call for more unorthodox policy prescriptions. The redistribution of land holdings may be an essential, albeit politically difficult, prerequisite, while political campaigns to exhort greater food production in the national interest may be a useful complement to more traditional market incentives. It bears repeating that where market incentives are used to generate an increase in surplus, they will need to be preceded or at least accompanied by an increased availability of consumption and intermediate goods if they are to achieve their desired results.

It follows, therefore, that sensible alternative programs would in general avoid an across-the-board commitment to export promotion. Subject to the food self-sufficiency goal to be aimed at over a target number of years, these programs would, in common with orthodox programs, seek to restore existing export capacity by removing systemic bias against the export sector. They would achieve this by reducing or abolishing export taxes, by improving the efficiency of export marketing arrangements, and by channeling some state investment funds and scarce foreign exchange into export rehabilitation. In addition, producer prices would be improved by devaluation, but the approach to exchange rate adjustment would differ from that of the Fund. Adjustments would be smaller, more frequent, and subsequent to, or simultaneous with, the receipt of external assistance, and adjustments to prices set by marketing boards would be selective, varying from crop to crop and not necessarily proportionate to overall devaluation.

More caution would be exercised in the length of time over which the reversal of bias against exports would take place, recognizing that structural bottlenecks might prevent rapid supply adjustment to price incentives. The extent to which attempts would be made to offset past erosion of real producer prices would not be determined mechanistically by reference to prices prevailing in some arbitrarily chosen base year. Instead, careful consideration would be given to the market prospects for each commodity, the range of both price and nonprice impediments to production and the overall distributional implications of possible price adjustments. This may result in the use of multiple exchange rates, either explicitly or implicitly.

The emphasis would also be on selectively encouraging new export products, although the prospects for rapidly expanding earnings from new commodity exports are quite limited in SSA. Export demand prospects would be examined on a product-by-product basis, and incentives, such as export subsidies, rebates, differential exchange rates, and access to foreign exchange, tailored accordingly. This would help reduce the inflationary consequences of a more general approach involving large devaluations (Schydlowsky (1982)).

Alternative approaches would be premised on the assumption that rectifying the large “structural” external deficits (Williamson (1982)) of SSA countries will not be achieved quickly. Exports are generally in the range of between 40 percent and 70 percent of the import bill even after prolonged import contraction. In many countries imports are much less than required to maintain capacity production—often by as much as a third. Adjustment will need to take place over many years and will not be an easy task. It must be stressed, however, that adjustment is essential and it is not proposed here that the Fund bear the responsibility of financing Third World structural deficits. Adjustment will have to be achieved primarily through export growth rather than import contraction, although in some countries some limited potential still remains for restraining nonessential consumer imports and in all countries some restriction of imported investment goods would be beneficial. This latter may do little to ease the immediate foreign exchange shortage, since a good portion of such investment is aid finance, but it would reduce indirect import demands and, more important, would reduce the pressure on domestic resources and on the administrative capacity of SSA countries. What is called for is a significant scaling down of investment quantity and a much greater preoccupation with improving investment quality. In this respect, investment funds should be concentrated on expanding food supplies, on the restoration and rehabilitation of capacity, including the traditional export base, and on new projects that might quickly yield significant net foreign exchange benefits. To the degree that resources permit, some portion of investment should be reserved for strengthening national economic integration in areas other than food, where this is consistent with national policy. Ideally, governments should also seek to make a minimum annual commitment to projects that further regional cooperation within the continent.

Import constraint will for some time dictate the pace at which strategies of national economic integration and regional cooperation can be pursued. For this reason such strategies will, ironically, rely crucially on export recovery and expansion in the immediate future. What is required, therefore, is not a retreat into autarky or a sudden delinking of SSA from the world economy (Amin (1974)); this would be as impractical as all-out export promotion strategies are undesirable. Rather, there will need to be a delicate balance between objectives, with incremental resources increasingly shifted into other sectors as export earnings recover. The allocation of investment funds between a few high-priority sectors, with a focus on relieving crucial linkages will therefore assume paramount importance. Success in this approach will require tackling investment planning much more seriously and much more systematically than in the past.

SSA governments might also use the crisis to make virtue out of necessity and compensate for past errors by closing down uneconomic projects, such as those with excessive reliance on imported products, or by pressuring them to recast their operations to improve the net social benefits they offer over a predetermined time period. The emphasis throughout should be on improved investment performance within the given objectives of national economic policy.

This approach to investment will have far-reaching implications for aid policy. It suggests that SSA governments should consciously and deliberately set out to reduce their aid dependence in the coming years. In some countries an absolute moratorium on new project aid might be appropriate. This would permit SSA countries to regain control over their institutions of government and would facilitate macromanagement, both of which appear to have been undermined in recent years by excessive dependence on aid (Morse (1984)). At the same time, efforts should be made to switch a considerable proportion of aid, both bilateral and multilateral, from the form of project aid to that of balance of payments or import support. The attraction to donors would be that this type of quick-disbursing aid would increase the returns to past project aid and would have a high payoff in incremental output, exports, and government revenue. Import support could be phased out over a period of years as exports recover, and project aid could be phased back in, albeit perhaps at a lower real level than in past years.

In order to expedite flows of assistance, a strong case could be made for the Fund and the Bank helping member countries arrange a package of support funding from donors in anticipation of an agreement over the contents of an adjustment program; otherwise, the delay between a Fund agreement and a (hopefully much larger) inflow of aid-financed balance of payments support might be as long as a year. The greater the volume of aid funds that could be mobilized in this form, and the closer in time to a Fund agreement these fastdisbursing funds could be arranged to flow, the less painful would Fund programs need to be.

It is envisaged, therefore, that the international agencies could play an important catalytic role in arranging donor support for adjustment programs, in much the same way that the Fund deals with commercial bank consortia in large debtor countries. This type of initiative would be acceptable to many SSA governments, “however, only if it complemented and supported alternative approaches to adjustment and, at the same time, recognized that the principal responsibility for aid coordination lies with recipient countries; otherwise it might serve only to increase external leverage over SSA in imposing an adjustment model that is, to say the least, contested. It might also undermine or preempt efforts of SSA governments to assert their aidcoordination responsibilities—an area in which there is much room for improved performance.

Alternative programs would explicitly outline their likely distributional implications. Generally, they would be accompanied by a clearly spelled-out incomes policy (Foxley (1983)) which would contain the government’s view of how the burden of adjustment would be borne. Ideally, it should make provision for incentive programs so that urban workers could be encouraged to minimize cuts in real income through increases in their productivity. Those countries committed to ensuring greater equity might wish to safeguard a portion of the government budget committed to such basic expenditures as health, education, and water supply, and to monitor the impact of adjustment measures on the receipt of such services by those groups considered particularly vulnerable. The well-being of children should, of course, be of prime concern in this exercise, and concrete measures should be taken to prevent increases in the incidence of infant mortality, malnutrition, and deprivation of food, water, health care, and education. Efforts to reduce budget deficits would, as far as possible, therefore protect these expenditures and focus on restraining spending in other areas or on raising revenues. The less well-off sections of society might also be given a degree of protection against austere adjustment measures through the maintenance of limited subsidies on basic food items, through price control on, or rationing of, items important in their budgets or through increases in the minimum wage. Each of these is open to objections on efficiency grounds, but may be justified in terms of equity where it can be shown that their benefits accrue predominantly to the low-income target groups. The severity of the economic crisis in SSA is such that it would be impossible to protect all low-income groups fully from the impact of adjustment measures. The best that can be hoped for is a more equitable sharing of the burden and a concerted effort to prevent basic needs from being eroded altogether. In this respect, the restoration of positive per capita growth rates, and an unambiguous focus on expanded food production would greatly facilitate more equitable stabilization programs. By the same token, this approach suggests the removal of price control on all but essential goods and the focusing of (limited) subsidies on commodities consumed largely by the poor.

Alternative approaches to Fund stabilization would, therefore, be more supply oriented than are traditional Fund programs, would avoid shock treatment and provide for more gradual, longer-term adjustment with more sensitivity to distributional issues. Strategic implications of stabilization measures would be put much more to the fore, and an across-the-board commitment to export promotion would be avoided. Food security would be assigned first priority, and provision would be made for the pursuit of other strategies consistent with the Lagos Plan of Action. Nevertheless, increased exports would be encouraged since additional foreign exchange earnings would be needed to finance this eclectic strategic approach, to help pay off debt-servicing responsibilities and to help reduce dependence on external aid.

This approach places less reliance on market forces than would the Fund and envisages a blend of direct controls and state intervention together with enhanced use of the price mechanism in certain areas. The precise mix would again vary from country to country. Likewise, there is no a priori assumption in this alternative approach that foreign private investment is either necessary or desirable in the forms and amounts in which it is likely to appear. For most SSA countries it seems likely that shifting the composition of aid and arranging debt relief will be of more practical relevance than encouraging foreign private capital inflows, but there will undoubtedly be exceptions to this.

It should also be evident that this type of alternative approach would place less emphasis on short-run demand restraint than the Fund’s usual approach. Supply expansion, especially when based on easing the import bottleneck, would in fact require an increase in working capital, and domestic credit should be expanded accordingly in the sectors concerned, or else recovery will be inhibited. Some degree of demand restraint will still be required on significant sections of society if expenditure switching and the incomeredistribution implications of adjustment are to be allowed to proceed. In this respect, control over budget deficits will continue to be a major focus of stabilization although, even there, supply-led adjustment would put more emphasis on achieving this through expanded budget revenues than would an approach which focuses disproportionately on short-run demand restraint. Nevertheless, there must be consistency in macroeconomic policy to ensure movement toward both external balance (a situation in which exports fill the gap between trend-import needs and anticipated longer-term capital inflows) and internal balance over a reasonable period. Demand restraint will undoubtedly have some role to play; what is at issue is not so much the need for it as the degree, timing, and distributional impact of that restraint.

There would still be a need for performance criteria, but these would be designed to reflect the changed emphasis of conditionality. They would be more in the nature of contingent conditions than fixed requirements (Williamson (1982)) and would be adjusted without penalty in the context of unforeseen international developments that might disrupt adjustment plans, including unplanned rear-end loading of programs because of delays in receipt of financial assistance.

Finally, African programs should provide for the strengthening of the research capacity of African governments and for improvements in the quality and the coverage of the SSA data base. Fund positions are sometimes based on extremely dubious figures, and disputes about data have led to problems between the Fund and SSA governments in the past. The international institutions themselves might also usefully devote more resources to studying the adjustment capacities of SSA countries and especially the distributional implications of alternative approaches. Resources should also be made available to enable SSA governments to purchase advice and assistance from overseas to facilitate the preparation of adjustment programs where local technical capacity is inadequate. Provision should also be made for the arbitration of differences between the Fund and SSA governments where these have led to a breakdown in negotiations. These are not novel proposals (see, e.g., Helleiner (1983)), but they continue to be valid proposals.

Adjustment and Finance Revisited

It is evident that alternatives of the type proposed would require SSA adjustment efforts to receive more financial support than they have up until now. The emphases on reducing supply bottlenecks, on gradualism and long-term programs, on equity, and on national economic integration would all imply greater demands on external financial assistance than would orthodox adjustment programs. If the Fund is to consider altering its approach along these lines it would also need to reassess its policies with regard to financing. A structuralist response to external shocks will inevitably require more financing than orthodox responses. The case for allowing poorer countries access to more liquidity—through allocations of SDRs, expanded quotas, or larger borrowing limits relative to quota, through a liberalized compensatory financing facility—is a powerful one, but it has met with little sympathy from the Fund and the countries that control that institution. The result has been that programs inevitably entail more shock treatment than many governments can sustain politically. Alternatively, and as the international institutions themselves admit, current programs in SSA can offer only partial recovery and face a high risk of collapse, even when governments possess the political determination to implement the required adjustments (World Bank (1985)). The creation of the World Bank’s Joint Program of Action for SSA is a step in the right direction. Its effectiveness will depend crucially, however, on the extent to which it can mobilize further net new funds from bilateral donors and, above all, on the willingness of both the Fund and the Bank to be more flexible in their approach to conditionality.

References

Comments

Azizali F. Mohammed

I have two preliminary difficulties in commenting on Professor Loxley’s paper. First, it is such a cornucopia of ideas about the Fund, some rather critical, that it is difficult to know where to begin. Second, he is so fair minded that for almost every criticism he also supplies the counterarguments. I find this particularly true in the case of the alternative strategy that he proposes when he states that much of the diagnosis on domestic policy shortcomings has validity, must be addressed, and for this reason, “alternative prescriptions will unavoidably contain many similarities with those advocated by the Fund and the Bank.”

Now, as one looks at the alternative program, one major characteristic stands out. All alternatives presented, whether they emphasize the reduction of supply bottlenecks, gradualism in adjustment, longer-term programs, or more equity-based programs, imply greater demand “on external financial assistance than would orthodox programs.” I would suggest that here the basic issue is joined. One cannot fairly compare two programs, one of which assumes a larger supply of finance than the other. The question therefore becomes, “What are the possibilities that one could evoke larger amounts of finance?” Professor Loxley has asked this question quite fairly, and I propose to answer it with equal honesty because I feel that the financial constraint is the fundamental constraint within which the Fund operates.

If one were starting with a clean slate for individual countries, this issue could perhaps be addressed in a far more constructive way, but it so happens that we are in the middle of an ongoing process. We have had four years of substantial injections of Fund money—SDR 4.4 billion into sub-Saharan Africa. The total amounts outstanding are SDR 6.1 billion at the end of 1984. If you look at the relationship between credit outstanding and Fund quotas—and I am including here all use of Fund resources, conditional credit, the compensatory financing facility, and the Trust Fund—for country after country the percentage of Fund credit extended relative to quota is already high. It is over 200 percent in most cases and in some cases approaches 400 percent. There are “track records” and institutional memories. There have been problems of arrears with certain countries. It becomes difficult to speak of larger financing flows when there is a perception in the institution that very large sums have already been committed and that therefore the prospects of continuing to make commitments on the same scale are not practical.

I would go a step further. Not only can we not expect to continue to provide resources on the same scale: it is probable that resources will be injected on a reduced scale in the coming years. This is reality. And one must accept this reality because one is also facing, at this time, a growing sense of uneasiness on the part of the countries that finance the Fund. The creditors of the Fund look at the figures of rising arrears, for instance. They look at what they call “prolonged use” of the Fund’s resources, where one program follows another year after year, and they ask, “How can we regard the resources we have provided to the Fund as part of our liquid reserves?” When one talks about putting in larger amounts for longer periods of time, one is talking about a fundamental change in the character of the institution. I do not venture to ask whether that change should or should not take place. I am merely pointing out that the creditors of the institution are faced with a major issue of how the Fund will develop. Will it remain a monetary institution? In that case, it will continue to get support. Or will it become a surrogate long-term lender? In that case, the risk becomes real that the Fund will be unable to raise quotas or even to obtain larger resources from existing quotas or lines of credit such as the General Arrangements to Borrow. I am sure that over the next few years the Fund will continue to provide additional amounts in individual cases, but the chances that it may be unable to do so in all cases should be taken into account in recommendations made for its future development.

This leads to a second point. If one cannot think of the Fund providing a substantial part of the financing, then one must look more carefully at the catalytic role of the Fund, the ability of the Fund to influence donors and creditors to provide more resources. Here I would agree with Professor Loxley that where large changes in policies are being made, particularly in exchange rate policies, it is essential that resources be available, preferably in advance, to make sure that the framework of incentives created through the exchange rate change will be supported through larger imports that remove supply bottlenecks and strengthen and reinforce the creation of new capacity.

As a practical matter, one must look carefully at the modalities of the “gap-filling” exercises in which the Fund has been engaged in the past two or three years to draw lessons out of this experience. Occasionally these exercises have involved commitments by donors that have not always led to disbursements in the period promised. We need to be thinking carefully about how to plan these gap-filling exercises prudently so as to ensure that the resources that are committed will, in fact, disburse in the periods assumed in the programs. This applies not only to the timing but also to the quality of disbursements. It is no use obtaining funds to aid projects if one is looking at the moment to commodity aid or program assistance. This is another area in which one must use the Fund as well as one’s own relationships with donors in order to get the right quality and quantity of external resources.

Third, there is the question of the timetable of Paris Club and London Club debt reschedulings. These timetables can slip, and when they slip, programs may fall out of line. Here again it is important to be quite sure that one is correctly planning these debt reschedulings and the bilateral agreements that follow the multilateral minute in the Paris Club, to be sure that one is getting the right amounts at the right times.

Finally, in all these matters, one must be quite sure that the commitments the country itself has made will materialize on schedule and on the terms envisaged in the program. Otherwise, one is not only risking the credibility of the country, but also the credibility of the institution that provided the judgment on the correct balance between financing and adjustment, determined the size of the gap that had to be filled, and specified the type of resources that would be required from other lenders or donors. If the adjustment is not forthcoming, the gap becomes larger. Clearly one loses credibility. And here one must look at this question of how far one can push the Fund into this catalytic role without, at the same time, becoming responsible for protecting its credibility. Credibility cannot be protected through public relations or image building by the institution itself. The image of the institution remains in the hands of its members.

Let me move on to another major issue raised by Professor Loxley—the distributional consequences of Fund programs and the apparent lack of sensitivity on the part of the Fund. May I suggest that distributional issues are so highly political that for an international institution to seek to influence these issues would be regarded by most, if not all, governments as an intolerable violation of national sovereignty? There is simply no way that a Fund mission chief could say to national officials that they should protect the salaries of their teachers and cut down the salaries of their policemen or that they should do something to reduce defense expenditures. The Fund staff would be told immediately that “this is not part of your mandate; please stick to the macroeconomic issues.” Finally, I must say that there exists a basic misunderstanding between us on the Fund staff and Professor Loxley regarding his sense of Fund programs being somehow imposed. There is no way that can be done. The Fund staff is dealing with countries on the basis of clearly established rules and on the basis of the decisions of our Executive Board. In that Executive Board, every member country is represented. When negotiation for the use of Fund resources takes place, the Executive Director is often present. He is aware of all precedents; he is aware of how other countries have been treated in similar circumstances; and he is going to fight for the country during the negotiations and in the Executive Board. Let us not depreciate the important role that our Executive Directors play in this negotiating process, and let us not ignore the fact that the Fund is here dealing with a sovereign member government that knows its business, that knows its priorities, and that knows precisely how it wishes to use the Fund at a particular time. All this talk about impositions strikes me as totally surreal. After all, it is the national officials who are putting their careers on the line. It is they who are making the difficult decisions. It is they who will face the political consequences of either success or failure. Hence, there is a basic difference between* us on the question of what role the Fund can play in distributional issues and on the general issue of how programs are developed and how programs are implemented.

Julio Jimenez

In these remarks, I would like to address some of the practical problems of Fund missions and Mr. Loxley’s suggested new approach. After many years of reviewing developments in Africa, I have difficulty in generalizing experiences from country to country. I was glad this morning that Professor Loxley advised us that his paper had Tanzania as its point of departure. I think, however, he errs in generalizing this experience to represent the experience of sub-Saharan Africa. For example, many stand-by arrangements in this region of Africa have not included exchange rate alterations. By and large, each country provides a different set of problems deserving a separate approach.

Programming for a stand-by arrangement is a race between adjustment and available resources plus debt service. Within this overall limitation, the approach is flexible. We have been reminded that in 1981–82 many stand-by arrangements, or rather an increasing proportion of stand-by arrangements, faced difficulties. Many of these had to be scrapped and begun again. This observation is true enough, but it does not represent the whole picture. Reference should be made to what these years reflected in the world economy. Few could, and few did, estimate the depth of the recession at that time or the magnitude of the fall in commodity prices. It is, however, a sign of the flexibility with which the Fund has approached these problems that many programs were reinstated after close consultation with the authorities.

The figures of the resource flows from the Fund to sub-Saharan Africa deserve a comparative look. Net flows from the Fund to sub-Saharan Africa during this period represented close to one third on average of the financing of the overall deficits of these countries. While it is difficult to measure exactly what other catalytic effects Fund programs may have produced, one item can be identified, and this is the relief that sub-Saharan countries gained from rescheduling. Rescheduling, on average, financed another 30 percent of the overall deficit. Resources from the Fund and financing made available by rescheduling probably provided about 15 percent greater inflow of imports than would have been available without these two sources.

The Fund staff must work within the realities of the world economy and certainly within the guidelines set by the Governors and the Executive Board. One of the problems in the negotiations of stand-by arrangements is estimating available resource flows. It is common to find authorities overoptimistic about the likely flow of resources, as well as about their ability to negotiate loans and make use of them within a given period. Stand-by arrangements must have a balance of resources to be successful. These arrangements are always reviewed several times, when problems can be discussed afresh and, most important, include a consultation clause of benefit both to the country and to the Fund. At any moment if authorities, for any reason, feel that the stand-by arrangement they have entered into has become unrealistic, they can call for a consultative review. It is, of course, better if these consultations are held before a major departure from the objectives of the stand-by arrangement.

During this symposium, I have heard unwarranted statements about the weakness of many African economies. We hear of disjointed economies and the lack of supply response, and I think perhaps we are misjudging these economies. As for the integration, it is only necessary to see how efficient parallel markets can grow in cases of disequilibrium and how quickly these parallel markets can reflect factors of scarcity and factors of risk. Economies respond to proper incentives. The comments of the Governor of Ghana contain an adequate estimate of how quick the response is to proper policies. A characteristic of countries in disequilibrium is a substantial shortfall in production. Proper incentives would allow this unutilized capacity to be brought on stream once more. In effect, even with some tree crops, such as tea, proper incentives have allowed increased fertilization and plucking of leaves to increase the productivity of the planted acreages. Viewing events in Africa, I think it is unrealistic to deny that peasant farmers react swiftly to incentives. Peasant farmers also respond quickly when incentives are not correct by not producing up to expectations.

We have, on various occasions, talked about the speed of adjustment and its relationship to access to the Fund. The Fund is realistic in believing that many of the deep-seated problems cannot be resolved in one year. Some countries have been in stand-by relationships for three or four years because they have made progress in adjustment, allowing the Fund to continue to provide the needed financial support. In other parts of the world—Mexico, for example—a quicker response has been expected from the economy and a shock treatment was given. The type and magnitude of policies applied in Mexico are not the sort that we would be applying to our African members. Policies must be proportioned to current disequilibria.

It is wrong to view Fund programs as simply concerned with financial matters. Most Fund programs include from the beginning a long series of supplyoriented measures. Such measures as adequate pricing, reduced public sector deficits (both in the government budget and public enterprises), and improved financial savings help transfer increased financial savings to more productive uses. Financial matters are, of course, closely monitored. Why? Because the Fund does not want inadequate financial policies to destroy the progress being made under the supply-oriented policies. Certainly, you can set up adequate producer prices, but if you have inadequate financial policies, you will find that they will quickly fall out of line and require additional changes. It is an inadequate interpretation to say that Fund conditionality is “pinpoint” conditionality. Credit limitations and budgetary objectives are outer margins. A country can fall anywhere outside these limits and have no difficulty in meeting the targets.

J.S. Addo

Instead of commenting on Mr. Loxley’s paper directly, I would like to tell the story of Ghana, because I believe that in the process I may be able to illustrate some of the points that he has raised.

I would like to start by giving you a brief idea about the history of the country. Ghana was, during the late 1950s and the 1960s, the world’s leading producer of cocoa. We produced 500,000 tons of cocoa annually. The industry comprised mainly peasant farmers. There was no state participation. Ghana in the 1960s was also the fifth or sixth most important gold producer in the world. The situation in 1981–82 was, however, as follows. GDP declined in 1982 by 6.4 percent; population increased by nearly 3 percent. Our export proceeds declined from just over $1 billion to just under $600 million. Our budgeted deficits constituted 4.4 percent of GDP, and we had an inflation rate of 122 percent. We had a regimen of controls: price controls, import controls, distribution controls. The list was so long as to cover almost every item.

The actual situation (and I have lived through it) in 1982 and the early part of 1983 could be briefly described as follows. We had to queue for days for oil, for food items, for soap, for toilet paper, in fact, for everything. We had to walk long distances because there were no vehicles, either because they had no tires or batteries, or because we could not get petrol. Food could not be brought into the cities from the rural areas for lack of transportation. Farmers had no fuel for tractors nor could they buy fertilizers. In the export sector we had overvalued the currency for a very long period. We had arrived at a stage where even for timber and gold the export proceeds converted into the local currency at the overvalued exchange rate were insufficient to cover the producer costs. The economy was spiralling down, but we had subsidies on petrol and other items, even though they were not available. We reached a stage that we had to barter goods.

We explored various avenues for addressing the situation and finally in late 1982 we decided to go to the Fund. We negotiated with the Fund. The resulting program was not imposed on us, because we went through it in detail. In some cases we rejected or argued against the Fund’s proposals; I will cite only two instances—interest rates and wages—where we disagreed with the Fund, and after some discussion our point of view prevailed.

In April 1983 we entered into the first stand-by arrangement with the Fund. We have the usual Fund conditions, which I am not going to go over, and we complied with them. We adjusted the exchange rate in one year by 91 percent. We liberalized prices and distribution and we continued to reduce the arrears position. We eliminated subsidies. We were able to perform satisfactorily under the first stand-by, so we entered into the second stand-by last year. The program is on track, and by the end of 1983 we achieved growth in GDP of 0.7 percent. In 1984 we had a growth of 7.6 percent.

Inflation has been reduced—we have the rate of inflation down to about 36 percent—and we have been able to give price incentives to farmers. At the same time as the drawings on the Fund, the World Bank gave us a quickdisbursing facility for the reconstruction of import credits to help improve supply, particularly in the productive sectors, namely agriculture, transportation, and timber.

By the end of 1984, we had improved our agricultural production. We were able to increase production of maize, for instance, so as to export 20,000 tons to neighboring countries. For 1985 we projected a GDP growth rate of 5.5 percent and a budget deficit ratio to GDP of 2 percent, with an inflation rate of 20 percent.

The strategy of the program was, first of all, to fill the gap in the balance of payments position; second, to rehabilitate the export and the agricultural sector so that we could stabilize export capability in the short run. As a result, we have already seen an improvement in cocoa production despite the fact that it is a tree crop. We expect this year a significant improvement in timber exports, and we think that the improvement in agricultural production will continue. The program I tried to describe briefly has had the support of the World Bank, of the donor community, and of other multilateral financial agencies. We think that with satisfactory performance we should be able to succeed.

The point I would like to emphasize here is that the alternative approaches suggested by Professor Loxley’s paper do not constitute a package. Some countries are already implementing some of the individual measures he recommends, but probably not in the degree he would wish. For the type of problem we have, we need a complete package of macroeconomic measures. The macroeconomic measures cannot solve the rural problems, and I would suggest strongly that we look at every possible alternative to the conventional Fund program. If we can design one ourselves, we will be in a better position to suggest improvements in the existing methods of operation of the Fund.

The responsibility for the Fund program is ours, and its management is also ours. After a program with the Fund has been agreed upon, we implement it. In the course of implementation there may be problems, such as administrative bottlenecks and physical constraints, which in the end may undermine the success of the program. Managing the program is consequently important. I think that Governors should look at this aspect seriously, because all the economic and financial problems of the country surface in our offices. If, in implementing a program, we do not anticipate the changing situation and do not design systems to enable us to respond to developments, we may find it difficult indeed to implement the program successfully. This requires effort on the part of all economic units in the country, and there is need for coordination at the country level in implementing a program. We Governors have the responsibility, the management responsibility, and this is an aspect that I, for one, want the Fund to reexamine. In regard to failed programs, they may not wish to tell us here, but we should be able to tell whether the fault is ours as managers of the program, or if it is the Fund’s, or that of somebody else.

John Williamson

My first comment relates to what Mr. Mohammed said on the difficult question of income distribution. Is it a fact that the Fund never adopts an attitude on what particular programs should contain? Do food subsidies never come in for particular criticism? Is the claim of Fund “neutrality” true or not true? I think we have to ask that question. Second, a comment on national sovereignty. Clearly there is a problem here; it would be unrealistic, even if one thought it appropriate, for the Fund to start trying to tell a country whether it should be policemen or teachers whose salaries are to be cut. Nevertheless, there is surely an intermediate stage at which the Fund should attempt to estimate the distributional impact of the program decided by the country and to pass on the estimate to the Executive Board with the observation that “if the generals go on living well, the populace won’t.” Maybe some countries wouldn’t like to see a program with that sort of implication going up before the Executive Board. Maybe it would help a little bit without in any way curtailing national sovereignty.

Reply

John Loxley

For those who came to this symposium seeking a genuine dialogue, the vigor with which Fund staff defend the status quo must be a source of great disappointment. The Fund apparently sees no need to change its approach to stabilization in Africa; this is evident from the focus of staff papers and commentaries on what the Fund considers its success stories. But surely this is only part of the total picture. Is there nothing to be learned from the large number of Fund programs that have failed, including those that have resulted in political upheaval for member countries, or from experiences with countries with which the Fund has been unable to reach agreement? Surely a dialogue requires an even-handed assessment of Fund experience.

Mr. Mohammed, for example, is not prepared to consider any changes of Fund policy even when these could be accommodated within the Fund’s financial constraints. Thus, while agreeing that front-end loading of finance is desirable to facilitate policy adjustments by member countries, he suggests that such financing be found from sources other than the Fund. Likewise, both he and Mr. Jimenez avoid dealing with the critique that a series of oneyear stand-by arrangements has quite different policy and planning implications from those of a single loan for the same overall period under the extended Fund facility. The former inevitably focuses on adjustments that can be made within a year and therefore disproportionately on demand adjustments. The latter would involve no additional financial commitment, but would permit a more gradual and a more supply-oriented adjustment. Other proposals that could be accommodated within the existing level of resources are those of greater involvement by member countries in the design of alternative programs; greater selectivity in allocating foreign exchange to imports and in the design of export incentives; a greater emphasis on food security; a less dogmatic faith in market forces; a shift of emphasis in the nature of performance criteria and a greater awareness of distributional implications. This list is not exhaustive but suggests ample scope for alternative approaches that do not necessarily imply the need for greater financial commitment by the Fund.

At the same time it is interesting to note that the staff faithfully reiterate the Fund’s position that its resources are rigidly restricted at this time. Given widespread excess capacity in the Third World and elsewhere, a strong case can be made for an expansion of Fund resources. Expanded allocations of SDRs would be the ideal method of seeking to inject further resources into the poorer countries of the Third World; the creation of special concessional funds through expanded quotas would be a second best method, while a revitalized compensatory financing facility or larger borrowing limits relative to quota would also be helpful. Third World countries continue to press for such reforms in the face of determined monetarist opposition from the Fund and the major powers that control it, because their perception is that the Fund is not now fulfilling its mandate. It is a moot point whether proposals for expanded funding are any less practical than the Fund’s insistence that the current crisis in the Third World can be met by more assiduous application of austerity programs. If, as one strongly suspects, current Fund approaches fail to contain the African economic crisis, then the politics of disaster may force the Fund to consider more expansionary approaches.

Mr. Mohammed states that the Fund does not seek to influence distributional issues as this would constitute “an intolerable violation of national sovereignty.” This is a remarkable statement. Fund conditionality affects income distribution both directly and indirectly. The abolition of urban food subsidies, restrictions on the growth of urban money wages, the imposition of user fees for government services, and the raising of export producer prices, for instance, all directly affect income distribution. What is more, it is through the distributional impact of such measures that resources are reallocated or demand is restrained. That the Fund undertakes no comprehensive accounting of the full distributional impact of its programs does not make that impact any less real. It is difficult to see how a proposal for a clear spelling out of the likely distributional implications of adjustment programs in the context of incomes policies articulated by member governments themselves could in any way be said to breach national sovereignty. On the other hand, it could be claimed with some justification that member governments are frequently not aware of the full distributional consequences of programs designed by the Fund and are not, therefore, in a position to propose alternatives.

Furthermore, while it is true technically that the Fund does not impose its programs on member governments, it is equally true that the Fund is a lender of last resort. In a generalized crisis, such as that now faced by Africa, the options facing member countries are limited. It is precisely now that the inflexibility of the Fund, and especially its take-it-or-leave-it attitude toward governments with which it disagrees, is particularly costly for African governments.

I disagree with the Governor of the Bank of Ghana that my alternative proposals do not constitute a package. Indeed, I would argue that they present a more comprehensive package than the one he outlines. In this connection, I am particularly struck by the absence of any mention by him of food production and the distributional implications of recent programs. Moreover, I do not share his optimism about the recovery of traditional exports since it seems that the recovery of cocoa output has precipitated a fall in world prices.

He is correct, however, in stressing, as Mr. Jimenez does, that there is some supply elasticity in most African economies. My point is that there are clear limits to that elasticity, limits set in part by import constraint and in part by the structural nature of obstacles to both output and export expansion. Once the immediate slack in the economy has been picked up, and this can only be achieved by a significant capital inflow, it becomes more difficult to expand output or exports, and it certainly takes time.

In 1981 devaluation was required of only 2 of the 10 borrowers which were not members of the French franc zone. In 1983 the equivalent figures were 7 out of 10.

The changes in regulations converting the compensatory financing facility into a high conditionality facility have not been critical, since in 1982/83 all but 1 percent of drawings under this facility were by countries already pursuing Fund stabilization programs.

Recent balance of payments data for SSA are difficult to come by. For 23 countries for which data were available in 1982/83, it appears that net Fund drawings were the equivalent of only 7.6 percent of total current account deficits. If Nigeria is excluded the proportion rises to 18.9 percent. It should be noted, however, that this excludes such large borrowers as Zaïre, the Sudan, and Uganda. Data derived from International Monetary Fund, International Financial Statistics.

Fund agreements are, however, a prerequisite for the rescheduling of debts (including official export credits) through the Paris Club.

Both Please and Payer were discussing the nature of the 1982 structural adjustment program of Tanzania which the author helped prepare. Some of the alternatives presented in this paper first found expression in this program which has not been fully implemented because of funding shortages due largely to a failure to reach agreement with the Fund.

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